Day Trading Risk
Consider the following points before engaging in a day-trading strategy. In this instance, a day-trading strategy means an overall trading strategy characterized by a client's regular transmission of intra-day orders to make both purchase and sale transactions in the same security or securities.
Day trading can be extremely risky
Generally, it is not appropriate for someone of limited resources, limited investment or trading experience and low risk tolerance. You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day-trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required to meet your living expenses. Further, certain evidence indicates that an investment of less than $50,000 will significantly impair the ability of a day trader to make a profit. Of course, an investment of $50,000 or more will in no way guarantee success.
Be cautious of claims of large profits from day trading
Be especially wary of advertisements or other statements that emphasize the potential for large profits in day trading. Day trading can also lead to large and immediate financial losses.
Day trading requires in-depth knowledge of securities markets trading techniques and strategies
In attempting to profit through day trading, you must compete with professional, licensed traders employed by securities firms. You should have appropriate experience before engaging in day trading.
Day trading requires knowledge of a firm's operations
You should be familiar with a securities firm's business practices, including the operation of the firm's order execution systems and procedures. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a stock suddenly drops, or if trading is halted due to recent news events or unusual trading activity. The more volatile a stock is, the greater the likelihood that problems may be encountered in executing a transaction. In addition to normal market risks, you may experience losses due to system failures.
Day trading will generate substantial commissions, even if the per- trade cost is low
Day trading involves aggressive trading, and generally you will pay commissions on each trade. The total daily commissions that you pay on your trades will add to your losses or significantly reduce your earnings. For instance, assuming that a trade costs $16 and an average of 29 transactions are conducted per day, an investor would have to generate an annual profit of $111,360 just to cover commission expenses.
Day trading on margin or short selling may result in losses beyond your initial investment
When you day trade with funds borrowed from a firm or another party, you can lose more than the funds you originally placed at a risk. A decline in the value of the securities that are purchased may require you to provide additional funds to the firm to avoid the forced sale of those securities or other securities in your account. Short selling as part of your day-trading strategy also may lead to extraordinary losses, since you may have to purchase a stock at a very high price to cover a short position.
Potential registration requirements
Persons who provide investment advice or manage securities accounts for others may be required to register as either an Investment Advisor under the Investment Advisors Act of 1940 or as a Broker or Dealer under the Securities Exchange Act of 1934. Such activities may also trigger state registration requirements.
LFS is committed to providing you with information about the purchase of securities on margin. Every investor who considers trading securities in a margin account should be alerted to the risks. Before you decide to trade on margin:
- Ask your LFS representative to discuss whether margin trading would help meet your needs.
- Carefully review the margin agreement provided by LFS or any other brokerage firm.
- Ensure you understand the costs associated with margin trading.
How margin trading works
When you purchase securities, you may either pay for them in full or borrow part of the purchase price from your brokerage firm. If you borrow money from the brokerage firm, you will open a margin account with the firm. The purchased securities are the firm's collateral for the loan.
If the securities in your account decline in value, so will the value of the collateral supporting your loan. In that event, the firm may issue a margin call, which requires you to deposit more money or securities to maintain your line of credit. If you are unable to do so, the firm may sell securities or other assets in any account you have with the firm to maintain the required equity in the margin account.
Frequently Asked Questions:
Yes. A decline in the value of securities purchased on margin may require you to provide additional funds to the brokerage firm that made the loan.
Yes. If the equity in your account falls below mandatory margin maintenance requirements — or higher "house" requirements stated by the firm — and you are unable to provide additional funds, the firm may force the sale of those securities or other securities or assets in your account(s) to cover the margin deficiency. You also will be responsible for any shortfall in the account after such a sale.
Yes. Most firms notify clients about margin calls, but they are not obligated to do so. Even if a firm contacts you and sets a date by which you must meet the margin call, it can sell the securities without notice to you to protect its interests.
No. Since the securities are collateral for the margin loan, the firm decides which securities to sell to protect its interests.
Yes. These changes often take effect immediately and may result in a margin call. If you are unable to satisfy the call, the firm may sell securities in your account(s).
No. An extension may be allowed under certain conditions, but the firm is not obligated to provide one.
Quarterly Order Routing Practices Report
LFS prepares a quarterly order routing practices report pursuant to a U.S. Securities and Exchange Commission (SEC) rule that requires all brokerage firm to make these practices publicly available. The report provides information on the routing of non-directed orders, that is, any orders that customers have not specifically instructed to be routed to a particular venue for execution.
LFS transmits non-directed orders to our clearing firm, who can then route customer orders to various venues for execution. We offer brokerage account services through: National Financial Services, LLC®, (NFS) a Fidelity® Investments Company.