We asked you: "What do you want to know about paying for college?
In response, you asked us: “Would you recommend day trading to pay for college?"
Before discussing if day trading is an efficient way to pay for college, we should discuss day trading in general. Day trading is when you buy and sell monetary contracts within the same day to make a profit. Many day traders trade stock, currencies, options and futures contracts.
“It is basically speculation,” said Travis Sapp, an associate professor in finance. “It is first important to clarify that this is not investing, investing usually has a long term motive where you are going to buy and hold for a certain period of time. There is no hard cut off but usually a year or more.”
Day trading used to be an activity that only financial firms and professionals took part in. Since the ability to trade electronically and trade through use of collateral, also known as margin trading, has become available, day trading has become something that anybody can do. In essence, day traders just flip stocks. They buy in the morning and sell in the afternoon, and gamble on short term price movements.
In order to start day trading you have to have 25,000 dollars minimum capital.
“There’s a substantial startup cost to being able to do this to absorb potential losses,” Sapp said. “This was put in place years ago because this is a riskier strategy, and you can end up with substantial losses during the day. A normal investment account you only need 2000 dollars.”
Hernán Machado, a junior in accounting and president of the Iowa State Investment Group, said day trading is not an effective way to pay for college.
“It is incredibly risky,” Machado said. “It’s what professionals dedicate themselves to do throughout 70 hours in a week, college students don’t have enough time.”
Machado had an internship last year at UBS in New York and witnessed day trading personally.
“These [day traders] are people that get to interact with the market every second of every day, they watch it,” said Machado. “If you don’t have that tie you can’t perform well in day trading.”
Sapp also said that he doesn’t recommend day trading as a way for students to pay for college.
“It's a very risky and stressful strategy,” Sapp said. “It is something that requires nearly full time attention. One would have to think a students time is better spent studying and learning, other than starting at stock tickers.”
If you are set on attempting to pay for college by day trading, Machado recommends that you find well defined securities that are driven by clear forces of supply and demand.
“The best strategy would be to trade securities which have very well defined trends,” said Machado. “Futures are pretty risky to trade. If you were to carry out this dangerous strategy, you'd want to pick securities that have very well defined movements to macroeconomic forces and trends.”
Sapp has one tip for students that are trying to day trade to pay for college, “Yeah… don’t.