Day traders thrive on rapid-fire speculation in the stock market. They actively buy and sell, holding for an extremely brief period -- sometimes just a few minutes -- to earn a small profit. There's no "investment" in this profession, just quick gains and losses that, in the hands of the skilled or lucky, may add up to a net profit at the end of the year. It's high risk and usually minimal reward.
Day Trading Origins
Online trading platforms first made day trading possible for amateur investors in the 1990s. The ability to get streaming "real time" quotes through a broker allowed day traders to see the action in stock prices as it happened. With that in mind, many traders believed they had an edge on big investors such as mutual funds, investment banks and Wall Street speculators. They could choose a few dozen stocks to follow, then set alerts on their platforms that flashed whenever their stocks made a quick move up or down in price.
The Ins and Outs
A day trader closely watches trends in the market, and never holds his position for long. If a stock moves favorably, he sells quickly and takes a profit. But he's also prepared for a loss. When opening a trade, he sets a stop-loss order close to the entry price. This closes the trade at a minimal, acceptable loss. In theory, getting into a trade when a stock starts its move gives you a better chance at a quick profit. At the end of the day, the board is clean -- day traders don't like to hold positions overnight, and risk unfavorable news moving their stocks in the wrong direction.
Day traders get a wide variety of results that largely depend on the amount of capital they can risk, and their skill at managing that money. If you have a trading account of $10,000, a good day might bring in a five percent gain, or $500. But there's also the problem of fixed costs -- specifically, the commissions charged by brokers. Each trade runs a few dollars; at the very reasonable rate of $7 to open or close a position, a trader completing 20 "round-trip" trades a day will need to earn $140 on winners just to overcome the fees. This is the main reason day traders don't earn money; one study found that less than 1 percent of day traders working for their own accounts actually earn a net profit.
The Big Leagues
Professional day traders work for investment banks, brokers and proprietary trading firms, which are dedicated to trading and nothing else. These firms support their traders with a base salary, plus benefits and a year-end bonus based on their results. Normally the house pays anywhere from 10 to 30 percent of a trader's net as a salary. The base may run $50,000 to $100,000 a year; a recent survey by Glassdoor.com measured the median professional trader salary at $85,000 yearly. Individual salaries in the survey varied widely by firm, from $47,600 at Edward Jones to $151,364 at HSBC Bank USA. But the pros also get the training and research that help them succeed, as well as the firm's capital to play with. It's a much easier proposition than trying this at home, and risking money that you might not want to lose.