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Day trading : What it is and how it works

This fast-paced trading style can be lucrative — and highly risky.

Day trading can be profitable. But even the most experienced and well-equipped day traders experience losses. Is day trading worth it? It depends on your risk tolerance and skill level.

What is day trading?

Day trading is the act of buying and selling the same security over the course of a single trading day. For example, let’s say you purchase three shares of Apple stock when the market opens and sell them that same afternoon. That’s a day trade.

Day trades can be executed in any market but occur most often in the stock and forex markets. Day traders typically aim to end the day with no open positions, which means they don’t hold securities overnight.

How does it work?

Day traders apply a significantly different approach to trading than buy-and-hold investors. Unlike passive strategies that seek long-term stability when selecting securities, day traders apply an active trading strategy that capitalises on market volatility. Day traders use short-term market fluctuations and high leverage to their advantage, pouncing on small price movements to turn a profit.

To make money on such small price movements, day traders must be willing to invest sizable sums. That, or trade options contracts, as the costs are often lower — though risks remain high. The more you invest, the more you have to gain — and more you stand to lose.

Risks and rewards

Day trading is a high-risk, high-reward investment strategy.


  • Loss of money. Day trading is fast-paced and complex. As a result, day traders must take bigger risks with their money than buy-and-hold investors.
    • Time commitment. Day trading requires a hefty investment of time — time that might have been better spent elsewhere should your strategy fall through.


    • Profit. The potential for profit is what draws many investors to dabble in this strategy. Returns are amplified by trading on margin or swapping derivatives.
      • Fast-paced. Day trading is exciting: Each day you could see any number of securities shift in and out of your portfolio for immediate gains or losses.

      How to lower your risk while day trading

      There are a few ways you can reduce risk while day trading.

      • Trading courses. The more you know about the market, the better. Invest in some trading courses, stock market games and investment books to grow your knowledge and confidence.
      • Stop-loss orders. Stop-loss orders help pump the brakes on potential losses by letting you set the lowest price you’re willing to sell a security.
      • Paper trading. Put your trading strategies to the test with a paper trading account: an account designed to simulate market trades using hypothetical money.
      • Use reliable hardware. Faulty technology is responsible for its fair share of losses in the day trading game, so invest in reliable technology and ensure you have a steady Internet connection.

      Investing strategies

      There are several short-term strategies you can explore. Here are a few examples.

      Trend trading: This involves studying the past price movements of stocks within a specific time frame, usually several months. From this evidence, trend traders make predictions about the direction stock prices will make in the future. They aim to buy stocks early during an upward trend and sell when they believe they will reach their peak based on the available evidence.

      Swing trading: This strategy entails holding onto a stock for a period of between a few days to a few weeks. Swing traders use different analytical methods and tools to predict the highs and lows of a stock’s price movements and then sell on the upside if those predictions materialise.

      News-based trading: This strategy relies on — you guessed it: news. News events can have a powerful impact on affected industries and sectors. News-based trading aims to wield the volatility triggered by news events to the trader’s advantage.

      To execute these strategies, you’ll need a share trading account.

      Trading on margin

      Margin trading is trading with borrowed money. When you trade on margin, you borrow funds from your broker to execute a trade. You’ll be asked to pay back what you owe with interest and your account serves as collateral for the loan.

      So long as the trade moves in your favor, trading on margin can be a lucrative practice: You increase your buying power by borrowing funds, execute a profitable trade, pay back what you owe and pocket the profit.

      The problem with margin trading is that the potential to compound the results of a trade swings both ways: you may increase your profit — but you may also multiply your losses. Stop-loss orders may help cushion the impact, but margin trading remains an inherently risky strategy best reserved for those with extensive trading experience.

      Day trading alternatives

      Day trading is ill-suited to beginners. If you’re new to investing, you may be better off with a more beginner-friendly investing strategy.

      Buy and hold stocks

      This strategy involves purchasing stocks and — you guessed it — holding them. Sometimes for years. Buy-and-hold investors aim to weather market volatility by holding onto their stocks regardless of how the market moves.

      The rationale behind this long-term strategy is that even if the market faces a downturn, it will eventually recover. For buy-and-hold investors, long-term gains are more appealing than trying to take advantage of small fluctuations in the market.

      Index funds

      You could invest in index funds that track the S&P 500 and other indices. These funds aim to reflect the return of their respective indices rather than take the inherently riskier approach of beating the market. The average annualised total return of the S&P 500 index over the past 90 years is 9.8%.

      Bottom line

      Day trading isn’t for everyone. It’s potentially profitable, but even with a solid strategy, a reliable broker and the right tech, the risk of losing money is high. Day traders must be prepared to lose capital, especially when trading on a margin.

      The right broker can play a pivotal role in your success as an investor. Explore your platform options among multiple providers to find the best account for your needs.

      Compare share trading platforms

      To day trade, you’ll need a share trading account. Compare your options by platform features, fees and research tools to find the broker best suited to your investment goals.

      Name Product Available Investment Types Min. Monthly Fee Available Markets
      Shares, ETFs, Managed Funds, Index Funds
      US, NZ, AU, Funds with exposure to multiple markets
      Finder Exclusive: Sign up through Finder and use the promo code "FINDER22" for a free Sharesies Wallet top-up valued at NZ$10. Promo code is valid for new investors from Tuesday 4th January 2022 - Friday 4th February 2022.Ts&Cs apply.
      Trade and invest in more than 8,000 companies, ETFs and managed funds across New Zealand, the US and Australia.
      Shares, ETFs
      Sign up to Hatch through Finder and get a $20 top-up when you deposit $100 or more.
      Invest in more than 4,100 US companies and exchange-traded funds (ETFs) - no minimum investment or monthly fees.
      Sign up through Finder and use referral code "FINDERNZ" for a free stock valued up to US$150.
      Trade more than 4,500 US-listed stocks and ETFs through Stake with $0 fees on trades.
      Zacks Trade
      Zacks Trade
      Shares, ETFs, Bonds, Options
      US, AU, Funds with exposure to multiple markets
      Trade and invest in global shares, ETFs, bonds, and options across more than 90 international exchanges with no inactivity and maintenance fees.

      Compare up to 4 providers

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