Building an investment portfolio is similar to dining out. The sheer number of choices for every budget and investment style can overwhelm any inexperienced individual. You may be gravitating towards stocks for a year-round investment, but there’s no harm in exploring options too!
Day traders trade in both stock and options. The trade within a single trading day is an open avenue that involves multiple markets. You can day trade in stocks and options according to your knowledge and interest in the given asset’s financial trends.
This article looks at the definition of day trading. It compares the day trade for stocks and options and explains the differences between both forms of investments. The possibility of investing in stocks and options simultaneously is explored to find a comprehensive conclusion for the case.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Is Day Trading?
Day trading refers to the practice of buying and selling securities within a single trading day. The principles of day trading apply to all markets, but it is mostly used in stock markets and foreign exchanges.
Day traders actively participate in intraday strategies to profit off the price changes for an asset. Day trading employs multiple techniques to capitalize on the market inefficiencies perceived by the prudent trader. They are well-educated and usually have a bulky wallet.
These individuals and their financial positions can manipulate short-term trading strategies and leverages to capitalize on minor movements in high-liquidity stocks. It is mostly characterized by the virtues of objectivity and self-discipline for the continuation of technical analysis.
A day trader is aware of the patterns of bidding and movements in the short-term market. The insight into daily operations plays a critical role in the success of day traders. The scheduled announcements about corporate earnings, interest rates, economic statistics, and market psychology trends have helped them prepare for the spontaneity of the short-term market.
Day trading is an exciting career option for those armed with strategy and skill. However, the profession fails to accommodate novices unaware of market dynamics and those who fail to be spontaneous. The potential of loss exists for the senior-most traders as well, but their experience in the field keeps them steady.
How to Day Trade Stocks?
Any stock that offers high volume and lucrative price movements is deemed appropriate for day trading. These factors are referred to as volume and volatility. They have a direct impact on the choice of investment for the day trade.
There is an ongoing debate about the merits of high volume, low volatility stocks for day trading. The truth is that volatility and volume change with time. Societal influence can add to a specific stock’s popularity for a short period, but a fresh cycle is initiated as soon as the stocks drop.
The range and trend of investment play a productive role in the direction of the day’s trade. Range refers to the difference between the top and bottom prices for a specific period, and trend refers to the generic price dynamic for the stocks in question.
You can decide the ideal strategy for day trading by isolating stocks that range or trend to know the day’s direction. You will need some time to find stocks that align with your strategies, but once you get started, then you can yield outstanding returns.
Day traders have multiple options in stocks. They can use screeners to find the right stock for the session or keep their perspective clear for new opportunities that may arise during the day. While some traders chose to continue the loop of trading the same stock, others try unconventional ways to stay afloat.
How to Day Trade Options?
Trading options is a convenient method of purchasing and selling stocks. It is easy, provides a hedging mechanism, and requires little cash to begin. The addition of leverage opportunities is a bonus in this case.
Historically, only the elite on Wall Street was capable of trading options. But as online brokerages have disrupted the outdated patterns of investment, anyone is free to start a day trade for options. All it needs is a little effort to align the primary resources, and you are ready to begin.
Essentially, you will need a laptop, an experienced broker, and a reliable internet connection to take the first few steps. To be successful in options day trading, you must develop a straightforward strategy. Entering day trade without a strategy can also lead to adverse outcomes as it reflects your lack of preparation.
You must understand that the market is rapid and repulsive; you need an immediate plan of action and a robust strategy to stay afloat in the circumstances.
Look for a reliable broker that is practical with your budget. It is natural to feel ambitious in your early days of investments, but you must look at the long term and consider the enormous commissions and fees involved with hiring a broker. Try to get educated about the trade before you sign any paperwork. Investing in educational resources before buying options will help you figure out an efficient strategy and reduce the chances of failure in the first place.
Many issues arise with trading options. The thinly traded stocks suffer from illiquidity. This means that a day trader may buy high-priced spreads and sell them at a lower price. Day trading requires much effort to understand the movement of stocks through watch lists. This makes it a challenging venture for most. You also need to meet margin requirements set by security regulators to qualify for day trading options.
How Is Stock Trading Different From Options Trading?
The primary difference between stocks and options is the context of ownership. Stocks don’t expire until the company is dissolved, but an option expires within a set period. An option is the right to purchase and sell assets, including stocks, at a predetermined price within a specified period. Options derive value from the underlying asset, but do not represent any ownership or control over an entity’s governance.
Can You Invest in Stocks and Options Simultaneously?
You can most definitely invest in stocks and options at once, but the situation’s intricacy deserves an explanation before you make any decisions. Undoubtedly, options trading is riskier than stocks, but it has a higher potential for better profitability.
Stocks make creative use of time to establish an impressive performance history. You can quickly look at the record and choose whether or not you will invest in a specific stock. On the other hand, options require further knowledge about the underlying values and implicit movements within a defined timeframe.
You can naturally diversify your investment portfolio by investing in either of the two. Since diversification of investment is a critical step for risk mitigation, you must take your time to decide which form of investment works well for your style and long term plan for the portfolio.
It must be noted that stocks are an excellent long term investment, but if you like to remain active and involved, then perhaps options could be a better choice for you.
Which Should You Trade? Stocks or Options?
Since this is not a mutually exclusive decision, you should trade both as long as they make strategic sense. Generally speaking, you should buy options as a hedging device if you plan to purchase large amounts of a specific stock that you’re not a hundred percent sure of. But if you buy small quantities, it is best to buy and sell stocks.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
Day trading has eventually received the popularity it duly deserves. It is an intriguing concept that works ideally for earning high profits. Day trading plays a significant role in maintaining market efficiency and liquidity. There is no doubt that the margins involved in day trading are too high to be left in the hands of a novice. The profession belongs to those who are trained for it!
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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