Here’s What Happens When You Day Trade

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Some investors try day trading in hopes of making bigger profits. Learn what happens when you day trade to see why this isn’t a good idea. 

The most widely recommended way to invest your money is long-term investing. Buy quality stocks or index funds, hold on to them for at least five to 10 years, and there’s a good chance your wealth will grow. It’s recommended because it works, as the stock market has historically returned about 10% per year before inflation. But it’s definitely not the fastest or most exciting option.

Investors hoping to speed up the process sometimes turn to day trading, which is when you buy and sell stocks on the same day. Day trading is popular on social media, where supposed gurus boast about their methods for doing it successfully — the methods that they’re selling, of course.

It’s easy to get transfixed by the idea of day trading. Quit your job, make a bunch of money trading stocks — what’s not to like? Since all the top stock brokers offer commission-free trading now, it’s also as cheap as it has ever been to day trade. Before you consider trying this type of investing, it’s important to know what usually ends up happening.

You’re probably going to lose money

The vast majority of day traders lose money. There have been many studies on this, and they don’t paint a pretty picture.

A study of Brazilian day traders found that 97% of those who did it for more than 300 days lost money. Only 1.1% earned more than the Brazilian minimum wage. A study in Taiwan had similar results, concluding that “Less than 1% of the day trader population is able to predictably and reliably earn positive abnormal returns net of fees.”

The odds just aren’t in your favor when you day trade. Statistically speaking, you have maybe a 5% to 10% chance of making money, and that’s being generous.

If you’re successful, you increase your tax liability

In the unlikely event you make money by day trading, you’re going to owe more in income taxes. When you sell investments you’ve held for less than a year, you incur short-term capital gains taxes. Those are taxed as income.

One of the advantages of long-term investing is that you don’t pay taxes on your capital gains until you sell. If you hold your investments for at least a year, you pay long-term capital gains taxes. Tax rates on long-term capital gains are lower than they are for ordinary income.

You’ll spend a lot more time monitoring your brokerage account

The objective with day trading is to buy a stock when you can get it for a good price, and then sell it once you can get a profit. And you need to do that within a single day, at least under the technical definition of day trading. Some investors use the term to refer to any short-term investing.

Because you need to be aware of price movements as they happen, day trading requires a serious time commitment. You could end up monitoring stock prices from the market’s open to its close every trading day.

Despite what some people may envision, day trading doesn’t mean you have a flexible schedule. It’s more like being on-call all the time. It probably won’t be feasible if you have a job or any other daily responsibilities that keep you busy.

You could be considered a pattern day trader (if you have a margin account)

If you have a margin account, which lets you borrow money to invest, there are special regulations regarding day trading. If you make four or more day trades within five business days, and those trades constitute more than 6% of your activity over that time period, then you’re designated a pattern day trader.

As a pattern day trader, you must maintain equity of at least $25,000 in your margin account on any day that you day trade. You also can’t exceed your day-trading buying power. If you do, you’ll receive a margin call and need to deposit more money to your account.

Day trading is one of those things where the expectation doesn’t match the reality. It might sound exciting, especially if you enjoy investing. The reality tends to be a whole lot more difficult and stressful. And there aren’t good odds of earning enough to make the entire venture worthwhile.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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