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Lots of investors believe they can beat the market and, thus, start buying up any stock that looks good. But if beating the market were that easy, wouldn’t everyone do it?
Yes, they probably would.
Unfortunately, it’s not so easy. Depending on the data sources, somewhere between 10% and 30% of mutual fund managers manage to beat their respective benchmarks in any given year.
In other words, well under half of professional fund managers who are paid to beat a given benchmark, say, the S&P 500, actually manages to do so.
This doesn’t mean those managers are not seeing a positive return. For example, equity funds had a 25% return in 2019, while the S&P 500 had a 33% return.
While this may not sound like a massive difference, 8% can actually be substantial, particularly if you have hundreds of thousands or even millions invested, as some investors do.
So, yes – beating the market is certainly not easy. But what if you want to try, despite the odds? Is it possible?
Tough, But Not Impossible
Sure, it’s possible to beat the market, but if you are a new investor, haphazardly buying a bunch of stocks is a recipe for disaster. If you are hoping to beat the market by trading stocks, you are going to have to do things a little more intentionally than this.
After all, the stakes in this situation are much higher than they would be if you were just buying an index fund. The potential gains are much bigger – but so, too, are the potential losses.
So, what are the ways in which you can beat the market? There are a couple of possibilities here, including buy-and-hold as well as day trading.
In this article, we will focus mostly on day trading.
What is Day Trading?
Day trading is essentially the opposite of a buy-and-hold strategy when it comes to individual stocks. Day traders hold stocks for a very short period of time before selling them at a gain.
There are many different styles of day trading, but all of them hold stocks for a small fraction of the time that long-term investors do. Some day traders sell their shares after just a few hours.
In this case, day traders use price indicators to identify stocks on the rise (referred to as “momentum”) to buy stocks that will be worth selling later in the day.
Some traders own shares as long as a few weeks, usually referred to as swing trading. In such a case, traders are holding fewer shares but hoping for bigger gains and, hopefully, a bit less volatility.
Is Day Trading Worth It?
I thought I would address this question because it seems to be a common one for day trading, but it’s kind of a funny question. The reason I say this is because it’s difficult to know what “worth it” means in this context.
That being said, day trading can be an incredibly lucrative profession. Some day traders make six figures several times over (not that this is typical, of course).
That being said, day trading is a full-time job. If you want to make a good amount of money doing it, then you’ll have to take it seriously.
If you are first starting out, it will probably take you a while to familiarize yourself with all the terminology and concepts. It can even seem overwhelming at first, although it does gradually get easier.
Still, you have to dedicate a good bit of time to day trading; in addition, you’ll need to be trading during business hours. It is technically possible to only trade for a few hours a day, but you’ll still have to do so between 9:30 a.m and 4:00 p.m. EST, while the markets are open.
How to Day Trade for a Living
The initial setup for what you need to start day trading is quite easy. All you need to have is a brokerage account with the brokerage of your choice.
However, note that FINRA requires you to maintain a $25,000 balance when day trading. This may be a tough pill to swallow for some, but, as the linked document explains, there are real reasons for this minimum; it’s not just some arbitrary number.
Day trading as a new trader is not the easiest undertaking, and if you try to just dive right in and start buying stocks, it’s likely you’ll make more bad decisions than good ones.
It’s best to do plenty of research before you start day trading (and if you don’t have $25,000 yet, this is your time to start learning).
As you begin to develop a baseline knowledge for day trading, you can open your first brokerage account and start making some small trades. Many brokerages don’t have trading fees or account minimums.
If you are using a platform that allows fractional trades, you can buy small amounts of blue-chip stocks such as Facebook or Netflix. Doing so will help familiarize you with the process and how the market works.
Once you become a little more comfortable with trading, you might want to take things to the next level. A great resource for day trading is Investors Underground. Check out this Investors Underground review to dive into the ins and outs of this platform.
Not only does Investors Underground have in-depth courses to help you learn about day trading; it also has several chat rooms that will alert you to the day’s trading trends.
IU has several other nice features, as well, such as nightly stock watch lists.
If you are new to day trading but are serious about trying it as a real profession, joining a trading community and reading up on finance blogs could be well worth it. Having that guidance will help ensure you aren’t just buying random stocks but that you are instead buying stocks that have real potential to turn a profit.
There are a lot of advanced metrics and data that goes into this. So, again, as a new trader, it would be difficult to figure this all out on your own. Having a group like this helps fast-track your trading career so you don’t have to make quite so many mistakes in the beginning.
Is Day Trading Right For You?
Day trading isn’t for everyone, nor is it the easiest way to make money from stocks. Nevertheless, it does have the potential to be one of the most lucrative forms of trading.
The main thing you must have if you want to get into day trading is time. While it may be possible to trade this way on a part-time basis, it undoubtedly requires more time than investing in index funds, for example.
And, of course, you must have a willingness to learn. Many of us have busy lives and have a lot of external stressors that would make learning a whole new craft too much to take on.
But if you have the time, a willingness to learn, and an intense desire to beat the market, day trading might just be right for you.
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This content is brought to you by Bob Haegele.
Photo: Shutterstock
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