Stock Market Description
Stock markets trade the shares of individual companies (such as Wal-mart, and British Telecom), and as there are many different companies, there are also many different stocks available for trading.
Stocks are traded via stock exchanges -- such as the New York Stock Exchange (NYSE) in the US, and the London Stock Exchange (LSE) in Europe -- and the same stock is often traded on several different exchanges at the same time. Most day trading brokerages allow traders to choose an exchange, or to have their order automatically routed to the exchange that offers the best available price at the time (Interactive Brokers' automatic routing is known as IB SMART).
The type of trading that most people are familiar with, is buying stock, waiting for its value to increase, and then selling the stock to take their profit (known as buy and hold trading). Day traders also want to make a profit when a stock's value is decreasing, so they need to be able to sell a stock, wait for its value to decrease, and then buy the stock back at a lower price (known as shorting a stock). Approximately 50% of stocks can be shorted (sold first), with the remaining stocks only available for long trades (buying first), because their liquidity (number of shares available) is too low to support shorting.
Stock markets trade the actual stocks (rather than contracts), but they still have contract specifications that provide the information that is needed to trade each stock. This information includes the stock symbol (such as MMM for 3M), the available exchanges (such as the NYSE, and PHLX (Philadelphia Stock Exchange)), the minimum price movement (usually 0.01), and the order size increment (usually 100 shares).
Suitability for Day Trading
Stock markets offer a wide variety of choice (many different companies), and many stocks can be traded both long (buying first) and short (selling first). The margin requirements for stock markets vary depending upon the current value of the stock. As an example, Interactive Brokers' margin requirements for a stock with a current value of $100 would be :
- Initial and Maintenance Margin - Long : $2,500 (25% of the trade's value) / Short : $3,000 (30% of the trade's value)
- Overnight Maintenance Margin - $5,000 (50% of the trade's value)
In general, stock markets are a good choice for day trading, but there is a big problem with stock markets that makes them not suitable for beginning day traders. The US SEC (Securities and Exchange Commission) has placed restrictions on the day trading of US stocks, by requiring that day traders deposit at least $25,000 in cash or securities (stock, options, futures contracts) with their brokerage. This means that beginning day traders need to have at least $25,000 in their day trading account if they want to day trade US stock markets. Further information is available in the day trading restrictions article. Note that these restrictions only apply to US stock markets, and do not apply to European and Asian stock markets, so European and Asian stock markets are suitable for beginning day traders.
In conclusion, if you have enough equity (cash, stocks, options, and futures contracts) in your day trading account, stock markets would be a good choice for day trading. If you do decide to day trade the stock markets, make sure that you choose stocks that have high enough volume (number of shares traded) and volatility (range of movement) to meet your trading systems requirements.