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If you want to day trade in the stock, commodities, or options markets you may want to seriously consider starting a business to do so.
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INVEST IN UNDERSTANDING DAY TRADING.
Day trading is a profession and a job. Even though you may choose to pursue day trading online and work at home in your slippers, it is still a job. It takes technical know how, experience, and the ability to recognize market movements and patterns. In short, you should consider day trading a business start up. If you were going to start some other business you would research it, be sure you understood it, create a business plan based on sound strategy and make sure you had buffer capital to cover any initial business losses.
That's what you need to do to start a day trading business.
DETERMINE HOW MUCH RISK CAPITAL YOU HAVE TO INVEST.
Though there are many people who will tell you that you can start day trading with very little to no cash. They will share the stories of anomalies who have started this way and made it. For most, it's a good recipe for bankruptcy. Ideally you should have six to nine months of expenses saved in a liquid emergency fund aside from any investment capital.
Whatever you have left beyond your emergency fund is your risk capital. It is what you can afford to risk. Never play at the day trading table with money you cannot afford to lose it. Why? Somewhere along the way you will lose it. It may take fifteen trades to get to a winning trade that is your profit for the quarter. And you may need additional capital to double down or cover trades with options.
OPEN A DAY TRADING ACCOUNT AND FUND IT.
Only fund your account with risk capital. You may need to open an account that is much larger than the risk capital you will actually invest in order to have free ranging day trading privileges. However, remember not to get sucked into too much investment in the market! You can lose your
life savings that way.
CONSIDER INCORPORATING YOUR DAY TRADING BUSINESS.
It is a smart idea to incorporate your day trading into an S-Corporation. I do not recommend an LLC or Limited Liability company for your day trading business. With an S-Corporation you have similar right without the double taxation of C-corporations. You will want to see a CPA for tax implications and consult with an attorney to set up your S-Corporation correctly and legally. Both lawyers and CPA's meet for the first time fee-free generally speaking. So at least go talk with them.
With an S-Corporation you can pay yourself and therefore build up social security benefits. You can also select the Section - 475(f) selection for your S-Corporation and then dissolve it if you change your mind. The 475(f) selection allows you to deduct all losses without limitation, count gains as ordinary income, and avoid the wash rules which don't allow you to count losses on identical securities.
I know that's a lot of jargon - but it's jargon you need to learn if you are going to day trade. See step 1 again.
FOLLOW THE STEPS FOR INCORPORATION IF FORMING AN S-CORP
- Pick a name and check with the Secretary of State to see if the name is available.
- Write the Articles of Incorporation.
- Write Bylaws
- Apply for Federal and State ID#'s ( S-Corps Form 2553 for Federal and Articles of Incorporation with the state).
I suggest having an attorney complete all of this for you. Many will complete this task for a mere $100. Since it would take you quite a few hours to figure it all out, that's a good deal.
START INVESTING ON PAPER TO SHARPEN YOUR TECHNIQUE AND STRATEGY.
Of course day stock trading is dangerous, risky--that's why it is so fun and exciting. Start paper trading, pretend trading, so that you get an idea of how this works. Many day trading online sites will allow you to open a pretend account with pretend funds to see how you will do. This helps you make your first mistakes on play money instead of your life savings.
Category: Personal Finance