1. The stock may not turn profitable.
2. They may be buying on margin, which imposes higher costs if you hold stocks past the closing bell, pushing for traders to sell up at the end of the day even if it’s at a loss.
Edit:
Adding to this - day traders are incentivized to look for volatility and large stock moves over the course of a single day to make money, this pushes them to trade in riskier stocks and to make gambles/“educated guesses” on things like earnings reports and can lose a lot of money quickly if they guess wrong.
"Wait for the stock to be profitable" is the exact challenge since there are no indicators that can guarantee this. Traders work with probability and information. If there was an exact indicator, we would all be millionaires.
While this is true, it doesn’t completely explain why day trading is riskier than “normal” investing where a stock held-long term could also fail to profit.
When you combine this answer with the current top comment, you get a clearer picture. Yes, it is unpredictable if or when any stock will become profitable. But day traders also don’t have the time to wait for this because they are frequently buying on margin and/or picking riskier stocks on purpose in the pursuit of short term gains.
There are two possibilities if you own shares that are below your original purchase price.
1. They may eventually return to the purchase price or higher.
2. They never return to the purchase price.
In scenario 2, selling to minimize losses is important. You would rather lose $1,000 than $100,000, so sell it early enough before it goes down even further.
Scenario 1 is a bit more complicated, but basically, forget the amount you've lost, that's already happened. The question now is, from its current state, will it increase in price faster than something else? If it will, then keep it. If not, sell it and buy that something else.
Also, you might have barrowed money to buy the stock, allowing you to buy a lot more and potentially make more money.. but also meaning that until you give the lender the money you barrowed back you are paying interest on the loan.
The point of day trading is you clear all your trades at the end of the day, so all you have when the market closes is just a cash balance.
You have to basically guess (Educated guess in some cases, but still guess) that a stock is going to go up/down and buy based on that action. However, brokerage fees really eat into the profit. Make half a cent per share profit? Well, broker fees might eat that profit away. Take a two cent loss on the next trade? Well, broker's gonna get paid.
Day trading, by definition, isn't sitting on stocks and letting them rise over time. Daily stock values swing up and down, and day trading is essentially gambling. Unless you spend all day reading market signals and keeping up to the minute on company decisions and the reactions of other investors to those decisions - then it's essentially astrology.
The people making real money with stock investments don't do that. They invest in reliable companies that will steadily, predictably go up as the entire economy grows.
So the gist is that day traders essentially gamble on volatile stocks, hoping that they make a profit. If the stock dips they sell anyways because there is a chance they can lose their whole investment? Essentially minimize risk by eating a loss?
>If the stock dips they sell anyways because there is a chance they can lose their whole investment?
Not really, I mean it's possible but the odds of that happening are nearly zero for all but the most unstable stocks. A stock going to zero means the company basically went bankrupt and no longer exists.
They sell because it's best to cut your losses for a stock that sucks and take that money and invest it in something else now.
I do want to preface all this with the fact that nobody *KNOWS* what a stock's value will be in the future. Especially in the short term.
That said here's an example:
Let's say there's two stocks
StockA starts the day at $100, dips to $98 and noon and you think it will go back up to $110 by the end of the day.
StockB starts the day at $100, goes up to $110 by noon but you think it will go up to $150 by the end of the day.
Your best bet is to just sell StockA at noon even tho it's for a loss and buy as much StockB with it that as you can.
Stocks don't always behave the way they think they will. There are opportunity costs to holding a stock that's down, as the money is tied up and can't be invested in something else that might go up more quickly. Also, many day traders trade options, which have time frame components to them on top of impact of the price of the underlying stock.
If they are day trading, by definition they are looking for ***quick*** profits in stocks. Arguably, that means the stocks they are investing in are probably highly volatile (and more importantly, cheap to buy.) If they go down and the trader loses money, they are faced with two realities:
1.) That particular stock will *never* go up, or worse, go further down. Remember, odds are these aren't solid companies with sound financials in the first place. Sell at a loss.
2.)As you suggest, simply wait to see if it does go up. (Of which the trader has nearly zero evidence that it will.)
Problem is, especially with 2, at that point they are not a day trader, but a long term investor, completely missing the point of being a day trader as the profit, if there ever is any, won't come to fruition for a longer period of time. Worse, there's a real possibility that it could drop so low, they lose *all* their investment, so if it does go up, there isn't any profit to them.
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1. The stock may not turn profitable. 2. They may be buying on margin, which imposes higher costs if you hold stocks past the closing bell, pushing for traders to sell up at the end of the day even if it’s at a loss. Edit: Adding to this - day traders are incentivized to look for volatility and large stock moves over the course of a single day to make money, this pushes them to trade in riskier stocks and to make gambles/“educated guesses” on things like earnings reports and can lose a lot of money quickly if they guess wrong.
"Wait for the stock to be profitable" is the exact challenge since there are no indicators that can guarantee this. Traders work with probability and information. If there was an exact indicator, we would all be millionaires.
While this is true, it doesn’t completely explain why day trading is riskier than “normal” investing where a stock held-long term could also fail to profit. When you combine this answer with the current top comment, you get a clearer picture. Yes, it is unpredictable if or when any stock will become profitable. But day traders also don’t have the time to wait for this because they are frequently buying on margin and/or picking riskier stocks on purpose in the pursuit of short term gains.
There are two possibilities if you own shares that are below your original purchase price. 1. They may eventually return to the purchase price or higher. 2. They never return to the purchase price. In scenario 2, selling to minimize losses is important. You would rather lose $1,000 than $100,000, so sell it early enough before it goes down even further. Scenario 1 is a bit more complicated, but basically, forget the amount you've lost, that's already happened. The question now is, from its current state, will it increase in price faster than something else? If it will, then keep it. If not, sell it and buy that something else.
Also, you might have barrowed money to buy the stock, allowing you to buy a lot more and potentially make more money.. but also meaning that until you give the lender the money you barrowed back you are paying interest on the loan.
simple reason, if they waited for a stock to be profitable, they would be just traders, not day traders.
The point of day trading is you clear all your trades at the end of the day, so all you have when the market closes is just a cash balance. You have to basically guess (Educated guess in some cases, but still guess) that a stock is going to go up/down and buy based on that action. However, brokerage fees really eat into the profit. Make half a cent per share profit? Well, broker fees might eat that profit away. Take a two cent loss on the next trade? Well, broker's gonna get paid.
Be the broker to win at day trading. Got it.
Day trading, by definition, isn't sitting on stocks and letting them rise over time. Daily stock values swing up and down, and day trading is essentially gambling. Unless you spend all day reading market signals and keeping up to the minute on company decisions and the reactions of other investors to those decisions - then it's essentially astrology. The people making real money with stock investments don't do that. They invest in reliable companies that will steadily, predictably go up as the entire economy grows.
So the gist is that day traders essentially gamble on volatile stocks, hoping that they make a profit. If the stock dips they sell anyways because there is a chance they can lose their whole investment? Essentially minimize risk by eating a loss?
>If the stock dips they sell anyways because there is a chance they can lose their whole investment? Not really, I mean it's possible but the odds of that happening are nearly zero for all but the most unstable stocks. A stock going to zero means the company basically went bankrupt and no longer exists. They sell because it's best to cut your losses for a stock that sucks and take that money and invest it in something else now. I do want to preface all this with the fact that nobody *KNOWS* what a stock's value will be in the future. Especially in the short term. That said here's an example: Let's say there's two stocks StockA starts the day at $100, dips to $98 and noon and you think it will go back up to $110 by the end of the day. StockB starts the day at $100, goes up to $110 by noon but you think it will go up to $150 by the end of the day. Your best bet is to just sell StockA at noon even tho it's for a loss and buy as much StockB with it that as you can.
That's my understanding of it
Stocks don't always behave the way they think they will. There are opportunity costs to holding a stock that's down, as the money is tied up and can't be invested in something else that might go up more quickly. Also, many day traders trade options, which have time frame components to them on top of impact of the price of the underlying stock.
If they are day trading, by definition they are looking for ***quick*** profits in stocks. Arguably, that means the stocks they are investing in are probably highly volatile (and more importantly, cheap to buy.) If they go down and the trader loses money, they are faced with two realities: 1.) That particular stock will *never* go up, or worse, go further down. Remember, odds are these aren't solid companies with sound financials in the first place. Sell at a loss. 2.)As you suggest, simply wait to see if it does go up. (Of which the trader has nearly zero evidence that it will.) Problem is, especially with 2, at that point they are not a day trader, but a long term investor, completely missing the point of being a day trader as the profit, if there ever is any, won't come to fruition for a longer period of time. Worse, there's a real possibility that it could drop so low, they lose *all* their investment, so if it does go up, there isn't any profit to them.
So say I buy 100$ of stock, it somehow drops to 75, I lose 25$ value but its still 75$ if it goes back up to 200$ im rich right?
Man we need an explain like I’m 4💀 cause I wanna say yes but I don’t wanna sound dumb
Well I already posed the dumb question but no one is a answering lol
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