8 Hidden Costs of Day Trading

Free Beginner Day Trading Series Investors UndergroundLet me guess? The stock market guru that is marketing you hard for your business didn’t tell you about the hidden costs of day trading. I know they didn’t but do you? The day trading chat room you are researching won’t tell you about these hidden costs until you join their “transparent and proven money making” service.

Why? Well, think about it. If they discourage, warn, advise you before you join their day trading service you might not actually join. That means less money for them. However, once you join you quickly see that there are costs that you didn’t account for before joining. Also, sometimes these stock market gurus make some of the costs seem like “must have” day trading tools. They will tell you that you need these “tools” to be successful but those tools aren’t a part of their initial service.

The truth is day trading is like any other business venture you are interested in starting. Start up costs are part of doing business. Don’t be completely discouraged by these costs but don’t be fooled by them either. My goal is to educate you now that you answered: is day trading for me. The reality is day trading is a lot tougher than you are being lead to believe. Hopefully knowing about these hidden costs will help you make a well informed and educated decision.

Hidden Costs of Day Trading #1 – Opening a Brokerage Account

I hope it’s obvious that you need to open a brokerage account if you decide to day trade. Which brokerage account you open will greatly depend on certain criteria: what type of trader you want to become and how much starting capital you have.

To be clear, opening a brokerage account isn’t one of the hidden costs of day trading, however, the amount of money you need to open one is.

Stock Trading Brokerage Firms

Let me explain.

To make things interesting, the US. implemented a rule called the PDT rule (pattern day trader rule). It states that you can’t day trade more than 3 times in a 5 day period unless you have $25,000 in your brokerage account.

Yes $25,000!

Stock market gurus don’t highlight that point. In fact, they avoid it as much as they can in the beginning. They also lead you to believe that it’s not that big of a deal. Furthermore that money in your account has to be maintained even though you will use it for commission and very probable losses.

If you look to avoid the PDT rule like I did then keep in mind $25,000 has to stay put at all times.

Don’t worry, there are ways around the PDT rule but there isn’t a clean solution.

For example, the PDT rule only applies to margin accounts and not cash accounts. However if you make a trade it takes 3 days (T3) for your money to settle in a cash account.  That means you better have enough money to continue to day trade or else this method won’t work. In fact, I don’t know anyone who doesn’t have a margin account.

Note: As of September 5th 2017 the settlement for money is now 2 days or T2.

Why do you need a margin account?

Well, once you understand shorting stocks you are going to need a margin account because you can’t short stocks unless you have one.

Ok! There are other solutions.

  • You can swing trade or hold positions over night to avoid the PDT rule. This is a very good option especially if you are new to trading.
  • You can learn about options and then decide if you want to trade them.
  • You can open multiple accounts and trade between them but then you need to have enough money to fund all the new accounts.
  • You can open a SureTrader account with only $500 and get 6 times margin. SureTrader is an off shore account (not US based) which completely avoids the PDT rule.

Regardless of what you decide, you will have to use $500 to $25,000 just to get set up to trade. That does not include trading money.

Hidden Costs of Day Trading #2 – Trading Platform

For a long time I used DAS Trader Pro. DAS is a comprehensive stock trading platform which has hot keys. Hot keys are almost a necessity if you plan on trading fast moving stocks that can be extremely volatile.

What are hot keys on a trading platform?

Hot keys are shortcuts that execute a pre-selected trade or series of trades by pressing a single or combination keystroke.

For example If I wanted to buy 1000 shares of XYZ stock I had hotkeys set up to do so. My hot keys were Shift + 1. Once those 2 buttons were pushed together I was in 1000 shares. Hot keys are fun and very scary.

On the flip side, I do know traders who don’t use hot keys but, they are veteran traders. They know how to avoid the emotional traps that can incur losses beyond your wildest nightmares.

These traders are quick and have a system that works for them. You on the other hand don’t know what works yet. What are you going to do when you have a 1000 shares of a stock moving 10, 20 or 50 cents in the wrong direction? Some of these stocks are violent and can slap you silly if you don’t know what you are doing.

Hot keys avoids all of this and can save you thousands of dollars each year.

Personally, I no longer use DAS nor hot keys because my trading has adjusted over the years. However, I used to enjoy DAS and spent $150 a month loving the protection it gave me. I needed hot keys and I couldn’t have gotten to where I am without them. DAS was the best of the best but gurus aren’t telling you about this hidden cost before you join their service.

Some stock market gurus tell you that you don’t need hot keys and others spring them on you down the road. Hot keys are a personal preference but if you aren’t smart with your trading in the beginning you might make costly mistakes not having them.

Anyway, besides DAS, I have used Active Trader Pro and Interactive Brokers’ platforms and both were considerably cheaper. In fact, I believe I was paying about $35 a month but their trading platforms are limiting and not highly recommended for the very active day trader. At least not in the beginning.

So, expect to pay anywhere from $35 to $150 a month for a trading platform. Once you get in the grove you will adjust your trading. Also, your trading needs will change so this cost will fluctuate depending on you.

Hidden Costs of Day Trading #3 – Commissions & Trading Fees

Trading commissions add up and they add up fast. If you are fortunate to be out of the PDT rule and you learn to scale in and out of your trades, commissions really eat up your profits.

Fidelity lowered their fees recently but I don’t recommend using them to actively day trade. However, I can manage to get in and out of 1000 shares for less than $10 @ Fidelity. That isn’t bad but trade 5 times a day for an entire week and you have spent $250 in 5 trading days. Times that by 4 weeks and now you are looking at $1000 monthly.

Best Online Brokers

Photo Credit – Investor’s Business Daily

Don’t worry (hopefully) you won’t be trading that much but you should know that commissions and fees add up if you aren’t careful.

One time I bought 1000 shares of a particular stock and my broker split up the purchasing of those shares 17 times. My commission on that 1 trade was nearly $70 and I hadn’t even sold my position yet.

Anyway, if you are conscience of commissions you could look into opening an Interactive Brokers account. They have commissions that are $1 per 100 shares.

Their fees are much more manageable and they have a decent short sellers borrow list. The only issue is you need $10,000 to open up an IB account which doesn’t get you around the PDT rule. On the flip side, it does ease the commission blow.

So, expect to pay anywhere from $2 to $20 on a 100 share round trip trade.

A round trip trade is a buy and a sell in case that didn’t make sense.

Hidden Costs of Day Trading #4 – Charting Platform

You don’t need to pay for a charting platform. PERIOD!

However, some stock market gurus will urge you to do so.

Why?

Because they get a financial incentive to promote it.

In fact, if you are fooled into thinking you have to pay for a charting platform you could spend another $150 a month or $1800 a year.

Hopefully you read this post before you were suckered into getting one and if you were… think about closing it NOW!

My Thinkorswim platform is 100% FREE and if you open one you don’t need to fund your account at all.

Thinkorswim charting beyond debt

The best part is that all these years later I still I love my Thinkorswim charting. I also highly recommend it.

Charting platforms are one of the avoidable hidden costs of day trading but you could be looking at another $1800 a year if you aren’t on your financial toes.

Hidden Costs of Day Trading #5 – Scanners 

You need a scanner to scan for the stocks that you are planning to trade. Even if you join a chat room you have to start thinking independently or else you will eventually lose more money than you expected.

Chat rooms will implore you to buy their proprietary scanners. These scanners might come free with your membership but then you need to join a stock service.

Scanners could run you another $100 a month or $1200 a year.

I am not going to lie you will need a scanner to screen and filter the stocks you are going to potentially trade. But, you don’t need to buy a scanner… especially in the beginning.

Thinkorswim has a free scanner that works wonders. If you match up most of the criteria from your stock market guru you can come pretty close to what they are looking at. It’s not a perfect system if you are trying to be identical to your guru but Thinkorswim is amazing.

In addition most stock market gurus scan stocks and send out watch lists. Use those to your advantage but don’t follow.

Lastly I post a daily watch list of stocks under $15 here. It’s free and I post it everyday usually before 9am.

My suggestion is don’t buy or pay for scanners or software in the beginning. Learn the ropes and find out what works for you first. If you become successful or you truly see a potential to have a stock scanner then do your research and find one that works for you.

You could be spending about $75 or $100 a year on scanners if you aren’t careful.

Hidden Costs of Day Trading #6 – Trading Losses

losing money in stocks

Photo Credit – SpeedTrader

Yep losses are considered one of my hidden costs of day trading because losing is a part of business. And, nobody is telling you that you will take MANY LOSES before you turn profitable.

Aside from luck you will be looking at a minimum of 6 months or so of consistent losses. Then when the tide turns you will hopefully be breaking even. Then if you are a part of the lucky few of winning traders you will turn from a losing trader to a winning trader.

In case you didn’t know 95% of traders fail and 80% quit before 2 years is up. Losses are tough to handle but you must know that it is a cost of doing business. You will lose money. How much you lose is dependent on your trading plan but it can be a lot of money if you aren’t smart about taking calculated risks.

Stock market gurus will convince you trading is easy. It is not. If you don’t believe me try to read their disclaimer page.

Here is small example in case you need a bit of inspiration.

Your guru will disclaim a lot because they know the chances of success are low and they need to protect themselves.

Loses are tough to calculate but if you start with $5000 then $5000 should be the maximum you are looking to invest in your day trading endeavor. If you are losing more than you started with you are either stupid or unfortunate like Joe.

Hidden Costs of Day Trading #7 – Taxes

stock losses and gainsTaxes are part of the hidden costs of day trading that everyone avoids. In fact, I haven’t met a stock market guru who talks about it for more than 3 minutes. Why? The reason is that taxes are usually the deal breaker for people starting or continuing a day trading path. Taxes are so costly and frustrating that most people bail out once they have learned the hard but very real lesson.

*Note – although I do my own taxes and I understand the tax law I am not an accountant. I highly suggest you talk to a tax accountant who is proficient in trading before starting a day trading path. Taxes are very serious and can be damaging to your account if you aren’t familiar with how they work.

Before we get into taxes you must realize that as a new trader you do not qualify nor benefit from being a day trader in the eyes of the IRS.

To be clear professional day traders are known as mark to market traders.

What is a Mark to Market Trader?

A trader who is engaged in the trade or business of trading securities or commodities. These traders may elect Mark to Market treatment under Sec. 475(f).

As a mark to market trader the price assigned to each of your stocks is the price that the market determined it would be at the end of the day.

So, if the IRS one day deems you a mark to market trader and a stock is trading between $10 and $11 during the day, you can buy and sell that stock between those prices anytime you trade it regardless if you are winning or losing.

However, in the beginning of your day trading journey you are not a mark to market trader. In fact, it is very difficult to become one as the IRS frequently challenges whether a taxpayer, who makes the mark-to-market election, is a trader.

So, being you are not a mark to market trader, you have to follow a rule your brokerage firm will automatically make you adhere to and that is called the wash sale rule.

What is the wash sale rule?

According to Fidelity:

A wash sale occurs when you sell shares at a loss and then purchase additional shares of a substantially identical security 30 days before or after the sale (within a 61-day window). Your purchase may result in the loss being deferred until you sell the newly purchased shares under the wash sale provisions of the Internal Revenue Code.

To go a bit further I decided to chat with a Fidelity representative to get a clearer understanding of the wash sale rule for the purposes of this post.

Here is what he said.

When you sell a stock for a loss, you can generally use that loss to offset gains on your tax return. If there was no wash sale rule, you could just sell things for a loss while just replacing the shares (essentially getting free losses for tax purposes, while just replacing the shares). It is like selling the shares in one hand and buying them with another. If you sell for a loss, the IRS looks 30 days before that sale date and 30 days after that sale date to make sure you did not just replace the shares for tax gains.

If you are still confused I will give you a real life example that I presented to the rep and his response to me about the wash sale rule.

Could you explain what happens to my stock price if I decide to buy XYZ stock at $10, sell it 1 day later for a $1 loss then immediately buy the same stock at the new $9 price?

The disallowed loss would be added to the price of the new shares. In essence, the $1 loss would be added to new shares making it look like you paid $10.)

Hopefully that clears that up. Yeah I know the wash sale rule sucks but you should be able to understand why the IRS had to put the rule in place.

Anyway, that isn’t it. There are other tax issues you have think about if you are going to be a day trader.

To make things worse if your capital losses exceed your capital gains for the year, the excess loss can be deducted on your tax return up to an annual limit of $3,000.

That means that if you take a $10,000 capital loss on the year you can only deduct $3000 from your taxes. The other $7000 gets rolled over for to the following year. However you can only deduct $3000 (that next year) which means that $4000 gets rolled over to the next following year. And then the next next following year… you get the point.

The fact is that the IRS will make you carry that $10,000 loss for 3 years unless you have capital gains that offset that loss.

Taxes are another hidden cost of day trading that is very tough to determine. Be smart and talk to a tax accountant proficient in trading so you aren’t unhappily surprised on April 15th.

Hidden Costs of Day Trading #8 – Opportunity Costs

What are opportunity costs and is it important to mention in the hidden costs of day trading?

100% yes.

Why?

Opportunity cost, also known as alternative cost, is the amount of money you could have received or used, but gave up, to take another course of action. That means that due to starting a day trading path you will give up the opportunity to make or use money doing something else.

And being that 95% of traders fail you are probably losing a huge amount of opportunity.

Henry David Thoreau Quotes

Simple Example of Opportunity Costs

My 7 year old son had $100 from birthday money grandma gave him. We told him he could do whatever he wanted with that money to see how he would spend it. After sizing me up, he told me he wanted to use that money to buy a pair of sneakers. The problem was that the sneakers he wanted were $100.

I almost died. $100 for kid’s sneakers. ARGH!

Anyway, I then told him that buying a more affordable sneaker would allow him other opportunities. I explained that if he found a pair that were less he could use the other money for other things (opportunities).

That is when his tools started working and he started to smile.

Luckily for us both he understood my financial lesson and found a better pair of sneakers for less than $40.

Does opportunity cost make sense now?

What can you do with all of that money you are about to dish out to day trading? Are there other opportunities that will allow you to make more money?

It’s impossible to know what the opportunity costs might be but you should, at the very least, take this hidden cost into consideration.

Final Thoughts

These hidden costs of day trading don’t include certain (other) things you might not have thought about yet. There are costs like my setup which includes a great chair, glass desk and 5 monitors. I spent a lot on set ups over the years but fortunately my photography business helped justify that cost. In addition, I paid nearly $10,000 on trading chat rooms, DVD’s and educational systems. I took losses, paid taxes and might have missed some costly opportunities along the way.

And here is the kicker… Those were not the hidden costs of day trading because some of those were costs I knew about before I started.

With all that said, all these years later I am still here trading and blogging about it so I must be doing something right.

Luckily for me some of those costs are a thing of the past but looking back I realize it was a very tough financial journey.

Unfortunately, most people I connect with look at day trading as a way out of the daily grind.

Sadly it might put you in deeper then you ever imagined.

So, diversify your financial situation like I try to do.

I am a blogger, corporate photographer, and I trade options as well as equities.

Oh and I was a landlord for many years too.

Sounds like a lot but its that kind of financial diversity that has kept me in the stock market game as long as it has.

If you need any help with your trading journey or would like to speak to me feel free to contact me here.

 

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Disclosure:

Some of the links in this post are from my sponsors. I thought you should know because honesty is better then sugarcoated bullsh*t.

Important Resources

  • Read my frequently asked questions or if you need personal 1 on 1 guidance from me on how to fully prepare as well as protect yourself from the misrepresentation please click here.
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  • I highly recommend the Simple Path to Wealth book to grow Your wealth simply and steadily. It will educate you beyond your financial imagination. This is my review of the book.
  • If you are new to stock trading test your knowledge here with a basic stock market quiz.
  • There are a lot of secrets in trading stocks and I reveal 20 of them in this popular post.
  • If you are confused about short selling stocks then read this simple explanation that will clear it all up.
  • This free stock research tool will give you all the necessary information on any stock you type into the search bar.
  • Do your best to avoid day trading distractions. Especially the 10 I list here.
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