A huge number of people dive head first into stock market investing with the goal being to earn solid long term profits. However once they get a feel for the markets, quite a few of these new investors will start to contemplate trying to earn profits from short term trading as well.
It is possible to make decent profits trading this way. I have banked some profits doing this myself in the past. However the trouble is that it is really difficult if you attempt to do so by buying and selling shares in the normal way, ie through your stock broker.
It all comes down to the size of your trading pot and the other fees that you need to pay for. To give you an example, if you hold a trading account with TradeKing, for example, and you try to buy shares in a certain company totalling $500 with the hope of selling for a quick profit, you may well find that this is not easy.
When you take into account the fact that you are required to pay a dealing cost of $4.95 when you actually make the purchase and an additional fee of $4.95 when you sell the shares, you are paying almost $10 to your broker just to trade in this company. So if trading with $500, you would have to see gains of 2% in the share price just to break even. That is before you even get into a profitable position.
It’s the same kind of story if you buy and sell shares using another major stock broker such as Zecco, for example. Their fees are also $4.95 per transaction at this moment in time, and it is worth considering that these are two of the most cost effective brokers you can use. Many of the other brokers have much higher fees in general.
So if you still have aspirations to become a top short term trader or investor, you need to be trading decent sized amounts each time. This will keep the transaction fees really low in percentage terms, and will make your profit targets a lot more achievable.
Another reason why some people can’t make money from short term trading is because the share prices of the big large cap stocks are often determined by the general price swings of the main stock market indexes. For example a FTSE 100 company will tend to move approximately in line with the main FTSE 100 share index, and the same can be said about the Dow Jones and it’s constituents.
This makes it very difficult to predict where a particular stock is headed in the near future, because it hardly ever moves independently of the major stock market index. You therefore need to try and gauge where the wider market is heading as well.
So the point is that trading stocks on a short term basis is not that easy overall (although not impossible). It is usually a lot more effective to buy stocks for the long term because stocks currently trading at bargain levels will nearly always go up to their true and realistic market value at some point, and you can make much greater gains because of the longer time frame.
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