March 4, 1999
that anyone can trade stocks on the Internet, a hefty batch of "day
traders" are becoming a force to be reckoned with for seasoned traders.
Ray Johns of Daytraders.com and Marc Beauchamp, of North American Securities
Administrators Association, Inc., answer your questions.
Dolbeare of Washington, DC asks:
What is the definition of a "day trader"?
Beauchamp, of North American Securities Administrators Association,
In general securities regulators make distinctions between "day trading," "online trading" and "online investing." Day trading refers to the activity of investors who are customers of the three dozen or so brokerage firms that specialize in day trading. These customers usually use the facilities of these specialty firms; normally they do not trade from home. Most if not all of these day-trading firms require that the customer end the day with no positions. Day traders, as the name suggests, try to capitalize on market momentum, often buying and holding a position for only a few minutes, hoping to get a sixteenth or a quarter of a point. According to estimates from the Electronic Traders Association (ETA) there are between 5,000 and 10,000 day traders patronizing these specialty firms. Regulators in Texas, Massachusetts, Indiana, Colorado and elsewhere have brought actions against several day trading firms, for unlicensed activity and for allegedly misleading potential customers about the potential of day trading and minimizing the risks, which are substantial.
In contrast, "online trading" is what investors can do from home using the Internet and online brokerage accounts with firms like E*trade, Ameritrade, Schwab or Fidelity. Again, "trading" suggests investors hold the stock for short periods, hoping to benefit from market momentum. By definition trading is very risky. Only people with the temperament of gamblers and who have money they can afford to lose should be day trading or online trading.
"Online investing," however, suggests that investors have done their homework, examined the fundamentals of the company, its business and the market and are making medium- to long-term investments using online brokerage services because of their convenience and the low commissions. There are an estimated 7.5 million Americans with online brokerage accounts.
Johns of Daytraders.com responds:
Traditionally, the definition of a "day trader" is given to someone that buys and sells stocks or options very quickly in the stock market. Often times, completing both the initial purchase and final sale of the shares owned in just minutes or hours, while attempting to realize fractional gains of as little as an 1/8th or a 1/4 point. As an example, a typical goal for a day trader may be to make an 1/8th point profit on 1000 shares of a stock such as IBM or AOL. A profitable trade such as this would produce a gain (before commissions and taxes) of $125.00 (i.e. 1/8th times 1000 shares). Since the stocks played are typically 'traded' during the day, as opposed to being held longer term, the nickname "day trader" was coined.
Yet, while this may be the official definition of a day trader, it may also be somewhat of a misnomer to believe that all day traders must complete both ends of a stock transaction in a single day. In fact, many people that I learned from along the way - and always considered to be "day traders" - often held the stocks that they played for several days or even several week in order to realize larger multiple point gains (as opposed to fractional intraday gains). Although it should be pointed out that in order to avoid confusion, I now classify these type of market players as "short term investors".
Nonetheless, the point here is that "day trading" (whether stocks are held for minutes or up to several days) is generally undertaken by those that have a much shorter term view of the stock market than those that might be considered more traditional investors.