A day trader is a self-employed individual who attempts to make an income by buying and selling shares using his or her own money.
The stock market is a global entity (or mechanism) which allows individuals and companies to buy and sell part ownership of other companies and commodities. Whilst the trading floors of the London Stock Exchange and the New York Stock Exchange spring to mind when one thinks of financial trading, the “market” is actually an intangible whole which allows privateers to interact with the world of global financial supply and demand.
Although everyone invests in the market with the universal goal of making money, there are a variety of reasons why someone may choose to attempt this. A company may buy shares in a competitor to diminish the risk of a rival growing larger than itself. An individual investor may be unhappy to trust their money to a pensions firm which promises only very modest returns over the life of the investment. Or the individual may have enough capital at stake to effectively derive a living from the profits of trading daily margins; in effect, they become a professional day-trader.
Any organisation which allows individuals to invest money in the stock market has to run the following disclaimer, by regulation of the Financial Services Authority: “Investors should be aware that past performance is not necessarily a guide to the future and that the price of shares and other investments, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested.” Essentially, investment in the market is a form of gambling, although knowledge and research can help to tip the balance in the investor’s favour. Of course, the potential for profit and loss is wholly dependent on investment strategy and the amount invested over a given period of time; there is no salary as such.
- Understand the workings of the global financial markets
- Watch and analyse the markets on a daily basis and formulate trading and investment strategies
- Appoint a broker to carry out transactions
- Accurately record and maintain records of shares under ownership
- Complete year-end tax returns for Capital Gains Tax (CGT) liabilities
There are no formal qualifications required to become a day trader as it is an activity of self-employment. The trader will need to appoint a broker, however, and there are criteria that must be met in order to do this. Typically, to open a trading account with a stockbroker, the individual will need evidence of full-time residence of the country in which the broker is based, a domestic bank account, proof of address, proof of age (candidates must be 18 years old or above) and contract notes of ownership for any shares currently under ownership being moved to the new broker.
Opening an account is not difficult, but traders working with small investment values should be aware that the broker’s fees relative to the value of shares will be very high per transaction. For example, a trader buying £150 worth of stock may incur a £15 standard broker’s fee per trade, whereas a trader using £5000 of liquidity to finance each daily position will still only incur £15 per transaction.
- Ability to make fast investment decisions based on price information, news and charts
- Ability to formulate long-term liquidity strategies
- Strong analytical skills to be able to read market data and consider alternative positions
- Have an understanding of various mitigation activities when the market turns bad, such as “shorting” and “averaging down”
- Access to supplementary finance in times where strategies are not delivering an income
- Ability to engage in various channels of communication with other traders to “talk up” a failing stock
Most of the work takes place at home, although improvements in today’s smartphones mean that traders can basically work from anywhere. Most brokers are contactable by phone, so the trader can view charts and place telephone instructions from a coffee shop or airport. It does not matter as the stock market is a truly global entity, and so a trader is able to buy and sell shares in companies that trade in markets outside their home country. This lends a nice feeling of being plugged in to the world market, and also forms part of the addictive excitement of trading stock.
It is a thrilling and inspiring job which can instil fear and unrivalled joy in equal measure depending on how the trading goes. In terms of proving an income to live off, it is not a job for the faint-hearted or the risk-averse.
It is possible to make large sums of money from stock market investing by relying on tips of other traders, or complete luck. However, it is generally assumed that investors learn as they trade over a number of years, learn from their mistakes and evolve their strategies as their strategic and analytical skills improve with time. The movements are often unpredictable though, which is why it is possible for very large financial trading organisations with decades of history to go bust from bad trading conditions, as was seen recently in 2008.
Traders often begin as hobbyists, putting a few hundred pounds into two or three stocks, and waiting for a year to see what happens. Most get bitten by the bug though, and start trading regularly. As portfolios grow in value and diversity and start to generate weekly profits, a lot of new investors start to toy with the idea of doing it full time. Some manage it successfully, whilst others hang on in there for a few months before returning to a less stressful and more reliable form of making money: a day job!
Traders are self-employed individuals who typically work from home. In this respect, there are no major employers as such.
Also known as…
- EFT trader
- Commodities trader
- Personal investor
- Market maker
- Financial analyst
- Hedge fund manager
What’s it really like?
Ollie Burt is an entrepreneur freelance day trader who plays the world markets from his home office in Leicestershire, England. His exceptional investment strategies inspire friends and colleagues to play the market too.
What made you decide or choose to get into this sort of career?
About five years ago, my father decided that he would sooner manage his own pension rather than trust the bankers and pension organisations, and he encouraged me to look at currency trading. I’ve been following the markets ever since, and now enjoy trading in currency and commodities.
Do you have a standard day or a standard type of `exercise’?
Yes, I check the news and do the same technical analysis of the markets every morning before trading. It’s important to first establish a technical and political overview of world sentiment before trying to put together an investment strategy.
What is the most common type of problem/call-out/enquiry to which you must attend?
Occasionally an important government official will say something that spooks the market and catches everyone by surprise, which can lead to some highly erratic price-action. You need to be able to adapt the strategy to overcome price wobbles, but also, to hold on when you feel a stock or currency has fundamental value and understand that short term price blips are exactly that.
What do you like most about the job?
Nothing is ever the same. Markets are always changing and evolving so mentally it is very stimulating. You really do feel like you are plugged into the epicentre of the global financial picture.
What do you like least about the job?
If you have a losing day then you have literally been to work for the day only to have less money than when you started, which can obviously be extremely frustrating. Also, if you are holding stock which is fundamentally sound but is being hammered by macro sentiment, then you can become frustrated with the short-sightedness of other traders. A general gloomy picture has a detrimental effect on every stock, so it’s a bit like throwing the baby out with the bath water.
What are the key responsibilities?
Trading is simply about taking risks, so managing those risks and keeping them sensible is the key to long term success. You don’t want to make £1000 one week just to lose £2000 the next.
What about academic requirements? Any formal demands, eg A Levels?
There aren’t any; qualifications are available but they are not essential because you are effectively self-employed.
What is the starting salary, and how does this increase over time with promotion?
There is no salary; if you are self-employed it comes down to two things: 1. How much capital do you have (£2000 is probably the minimum to realistically start from 2. How successful you are (the more trades you win the more money you make). Performance varies dramatically; some traders lose money whilst others make millions on similar holdings.
What advice do you have for someone who is looking to get into this as a career?
Experience is very important and you can never do too much research. Develop a strategy, back-test it to prove it works and then learn how to put it into practice and how to stick to your plan.
What are the most important qualities an applicant must and should possess?
Quite simply, the ability to keep your own head whilst everyone else around you is losing theirs.
Any closing questions, comments or additional advice?
Trading can be an emotional roller-coaster so take care. Never invest more than you are prepared to lose – that can be anything up to 100%. And never borrow money to finance a position, as you can end up with losses well above your ability to repay them. Stay sensible, have fun and don’t get (too) hooked!