Can I Make $1,000 a Day by Day Trading?

Day trading — the process of buying and selling one or more stock positions within the same day — can be very lucrative. It can also be very risky. While it’s not outside the realm of possibility to earn $1,000 a day by day trading, reaching that level on a consistent basis requires several things: knowledge, discipline and a lot of cash to start with.

Here’s what you need to know.

See: 3 Things You Must Do When Your Savings Reach $50,000

What Is Day Trading?

Day trading means actively buying and selling stocks within the same day — sometimes within minutes or hours. Day trading takes advantage of the frequent fluctuations in the prices of stocks. An example of day trading would be buying shares of a company early on a day when the company is expected to announce a new product that will likely impact the stock price. If the stock jumps, the day trader would then sell those same shares they just bought, realizing a quick profit.

Margin Trading

Day trading sometimes involves borrowing money with which to trade. This can take the form of margin trading, which means that you borrow against the securities in your brokerage account to buy additional stocks. Borrowing the money to buy more investments prevents you from having to sell your investments to generate the cash to buy more. The downside is that if the investments you buy on margin don’t perform well, you will have to sell your original investments to pay off the margin balance in your account.

Here’s an example. Suppose you buy 10 shares of XYZ Corp. for $50 per share, for a total purchase price of $500. XYZ Corp introduces a revolutionary new product, and the stock price soars to $75 per share. You sell your position and take a profit of $250, or 50% of your original investment.

If you bought those XYZ shares on margin, you would pay just $25 per share, borrowing the remaining $25 per share from your broker. You would spend just $250 to make a profit that comes out to close to $250, or a return of nearly 100% on your investment.

So why doesn’t everybody buy on margin? Here’s the downside. Suppose, instead of rising to $75 per share, XYZ Corp. dropped to $25 per share. You’d lose 50% of your original investment if you had bought the stock outright. But you would lose 100% of your investment if you bought on margin. In addition, when you buy on margin, you have to pay interest to your broker, so you’d actually make a little less than 100% in the first example, but you’d lose more than 100% in the second.

Options Trading

Day traders sometimes take part in the buying and selling of options, which can include puts and calls. Options are essentially a bet on the direction a stock will move. An option gives an investor the right, but not the obligation, to buy or sell a specific security at a specific price (called the “strike price”) at a future point in time.

In order to make money buying or selling puts or calls, you need to be confident of which way the stock will move. When you buy a put, you are buying the right to sell 100 shares of a particular stock (the “underlying security”) at a specified price in the future. If you buy a put, you are betting that the share price will decrease before the put expires. Then you can purchase the stock at the then-current price and sell it according to the terms of the put, which is at a higher price.

When you buy a call, you are buying the right to buy 100 shares of a particular stock at a specified time in the future. In this scenario, you are betting that the stock price will rise above the strike price between the time you buy the call and the time it expires, so you can buy the stock at a lower price than it is currently trading at, and immediately sell it for a profit.

Buying and selling options is not the same as day trading, since options are for the right to buy or sell at a future date. But puts and calls can be bought and sold by day traders. Depending on the movement of a stock on a given day, the value of a put or call may go up or down, which can result in gains or losses for day traders.

What Factors Affect How Much Day Traders Can Make?

The amount of money day traders can make depends on a number of factors, including how much they have to invest, how much risk they are willing to take, how knowledgeable they are and, frankly, how lucky they are.

The amount of money available to invest is a big factor. If you’re starting out your day trading career with a bankroll of a million dollars, you could potentially make a lot more than someone who’s starting out with $1,000. You would have the resources to take advantage of many more opportunities the minute they come up, which is, after all, the secret to day trading.

How Can a Day Trader Make $1,000 a Day?

In order to make $1,000 a day by day trading, you have to have a lot of money — or margin — to start with. Rare (if not extinct) is the stock that doubles its price in a single day. Even a price increase of 10% in a single day is very uncommon.

In order to make $1,000 in a day on a stock that increases 10% in a day, you would have to invest $10,000 in that stock. If you wanted to trade on margin, you could invest a little more than $5,000 and still make $1,000 on that trade. What might be more realistic would be to attempt to find a stock that goes up 2% in a day, which would mean you would need to invest $50,000 (or $25,000 on margin, plus the interest).

Finding these kinds of investments day after day is exceedingly rare. Although it’s possible to make $1,000 (or even more) in a single day when you are day trading, sustaining that level of gain over time is very, very difficult.

What Are the Risks of Day Trading?

Remember that if you trade with enough volume and frequency to make $1,000 a day by day trading, you must also be prepared to lose $1,000 a day. Any stock you buy with the intention of selling very soon after at an increased price has an almost equal likelihood of falling in price, leaving you with a loss. So, day trading, especially at these kinds of numbers, is not for the faint of heart.

Day trading has seen increased interest in the past few years, primarily due to the explosion of so-called “meme stocks” such as GameStop and AMC. These are stocks whose prices were manipulated by day traders who communicated with one another to inflate the prices by buying up large investments in these stocks. They drove the prices up in this way, and then quickly sold, leaving the investors who got in just a little too late holding the proverbial bag — with a portfolio full of shares they had paid a bundle for, that were now close to worthless. The meme stock trend demonstrates the risks of day trading. Most day traders are no wiser than other investors, so they are often buying and selling based on the same information everyone else has.

FAQ

• Is $1,000 enough for day trading?

  • Yes. You can begin day trading with $1,000 or even less. You may not be able to give up your day job if you're day trading with $1,000, but you can certainly get a feel for it. It's a good idea to start small because you should only invest as much as you're willing to lose, especially in a risky venture like day trading. If you are a "pattern day trader," or someone who executes four or more day trades in a margin account within five days, you are required to have an account balance of $25,000, according to FINRA regulations.

• How much can you realistically make as a day trader?

  • This depends on how much money you have to invest, how willing you are to take on risk, and how knowledgeable you are about the companies you'll be investing in. You also have to have some luck on your side. You could make several thousand dollars a month by day trading if you start with a good-sized investment portfolio and make good investing choices.

• How much money do day traders with $10,000 accounts make per day on average?

  • Over time, a skilled day trader might average a 2%-3% return on their investment daily, assuming they do considerable research on potential investments. Therefore, someone with a $10,000 account might make $200-$300 per day.

This article originally appeared on GOBankingRates.com: Can I Make $1,000 a Day by Day Trading?