How to open a day trading account?
Opening a day-trading account is simple:
- Begin opening an account. You typically start the process by navigating to the website of your chosen day trading platform and clicking "Open Account."
- Enter your necessary personal information. This may include your address, contact info, and Social Security number.
- Fund your brokerage account. If you are flagged as a pattern day trader, you will need to maintain at least $25,000 worth of equity in your account.
How to open a day trading account is the same process as opening a standard brokerage account. You typically don't open special "day trading accounts."
How to day trade
Day traders try to identify patterns or trends to profit from short-term movements in a stock. For example, you might identify a pattern in Apple's stock chart and predict the share price will rise. You'll buy shares of Apple, and when the price rises, you sell, pocketing the difference. Active day traders attempt to profit from trades like these several times in a day.
LEARN MORE: How does day trading differ from investing?
What investments can day traders make money from?
Day traders can make money from buying stocks and options and selling them for a profit. However, this is a relatively risky investment strategy. How much money you can make (or lose) depends upon volatility, how familiar you are with what you're trading, and other factors.
The more actively you trade, the more trading fees matter. $0.65 per options contract sounds small, but 100 of them costs you $65. Small fees add up quickly.
Likewise, the more margin you use, the more interest rates matter. If you borrow $10,000 for one year at an 8% rate, you'd owe $800 in interest fees, regardless of your earnings -- or lack thereof. Fees and rates strongly affect how much money you can make day trading.
How much money do I need to start day trading?
The short answer is that it depends how active you want to be in the stock market, and how long you plan to hold stocks. If you simply want to buy and sell stocks every so often, there's no set-in-stone minimum.
It's important to know about the "pattern day trader" rule and how it could affect you. By FINRA's definition, a day trade occurs when you buy and sell the same stock in a margin account on the same day. (If your account doesn't have margin privileges, day trading is typically not possible.)
According to FINRA's rules, you'll be flagged as a pattern day trader if you complete four or more day trades in a rolling five-business-day period. Once you do this, you'll typically be considered a pattern day trader, even if you break this pattern -- the rule says a broker can identify you as a pattern day trader if there's a reasonable belief you'll engage in day trading.
If your broker flags you as a pattern day trader, you'll need to maintain $25,000 of equity in your account. You don't need to use it all to day trade. For example, if you hold $1,000 in long-term investments, it counts toward the total. But it must be in your account if you plan to day trade. There are other limitations that apply to pattern day traders, but this is how it applies to the capital requirements.
What are the risks of day trading?
Day trading can be extremely risky. As regulatory agency FINRA says, "Day trading generally is not appropriate for someone of limited resources, limited investment or trading experience and low risk tolerance. A day trader should be prepared to lose all of the funds used for day trading."
Simply put, stocks can be extremely volatile over short periods of time, and it can be painfully difficult, if not impossible, to predict their movements. There's no such thing as a 100% reliable day trading strategy, or anything close to it.
The majority of day traders lose money. The odds of making money day trading is low, thanks to the bid-ask spreads of stocks. The price you can readily sell a stock for is typically lower than the price you can buy it for at any given time. Usually, the difference between the two is just pennies, but when you're trading in and out of positions all day, it can cost you quite a bit.
Day trading can be especially risky if you're using margin or options to trade, or if you trade by placing short sale transactions, since these can make your account especially volatile. In some cases where trades go wrong, it's possible to lose more money than you invest.
LEARN MORE: What is stock market volatility?
What is day trading?
The term day trading is often used to refer to any investor who frequently buys and sells stocks, but the true definition is someone who regularly buys and sells the same stocks during the same trading day.
Regulatory agency FINRA formally defines a day trader as someone who buys and sells the same stock during the same trading day at least four times within a five-business-day period. This is known as a pattern day trader.
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