Can you make a living trading stocks?

Can you make a living trading stocks?

You can make money trading stocks, but doing so is risky and most traders lose money. Traders often have to pay capital gains tax, even if you net losses. Different ways to trade stocks include day, swing, momentum, and options trading.

Imagine, replacing your full-time income by trading stocks. You spend one hour or less per day and make more money than you did at your 9-5.

Making a living by trading stocks is possible.

Luckily for you, I’m going to show you that you can make a living trading stocks. I’ll show you the risks and different ways to make a living with stocks. All you need to do is pick a method, understand the risks, and start practicing.

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Can you make a living trading stocks?

You can make a living trading stocks, but it’s risky. Most traders lose money or never make it as a trader because of the difficulty. Additionally, you are responsible for paying capital gains tax on your trades, even if you net losses.

Most inexperienced traders jump in with a large amount of money. They’re eager to learn the ropes and want instant success. However, most traders lose money, especially when they’re just getting started.

You don’t want to be the trader that put their life savings into their first trade. They don’t understand how the stock market works or what they are investing in. The stock drops 30% and they panic sell and can’t recover the loss.

Losses hurt and you have to get significant gains to recover.

Imagine, your $1,000 investment drops 30% which now leaves you with $700. You now need a gain of 43% to break even and reach $1,000 again.

Short-term capital gains are taxed as ordinary income as well. Short-term capital gains are on stock sales held less than a year. Let’s assume you’re in the 15% tax bracket already, so your gains are taxed at 15%.

You’re trading with $50k and make a 20% return on investment. You’ve made $10k, but now your next trade with $60k drops 30% and you sold. You’re now at $42k, or an overall trading loss of $8k.

Tax code allows you to offset $3k in losses. Therefore, you have to pay 15% on $7k because you still have to pay taxes on your first trade. So between your trading loss of $8 and your taxes, you’ve really lost $9,050.

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How do you make a living trading stocks?

The best strategy for making a living trading stocks is to find stocks with potential to increase in value, buy, and hold. However, you can make a living by day, swing, momentum, and options trading.

Day Trading

Day trading is buying and selling stocks on the same trading day. You take advantage of small price increases, buying and selling frequently. Each trade you might make 1-2% profit.

Day Trading is a very fast paced form of trading. You have to be focused and constantly watching your trading screen.

Frequent trading is going to cause you to be marked as a pattern day trader. As a pattern day trader, you’re required to keep $25k in your brokerage account at all times.

Swing Trading

Swing trading is when you find quality stocks that are currently down in price. You think they’re going to go back up in value and the price drop is a momentary drop. You buy the stock, wait for the recovery, and then sell your shares.

Swing traders can have a position for multiple days to months. You have to be patient, because it’s going to take a long time for the stock to recover.

Momentum Trading

Momentum trading focuses on finding stocks currently on the rise. The thought is that companies whose share prices are currently increasing will continue to do so. You ride the wave of success and sell your shares before the price drops.

Options trading

Options trading gives you the right to buy a stock at a later date for today’s price. You don’t have to buy the stock if the share price decreases, but you will lose your premium.

For example, a stock may be currently trading at $100 per share. You think this stock is going to be worth more in the future, so you create an options trade. You pay a premium for the right to buy the share at today’s price at some time in the future.

A week later, the new share price is $120. You execute your options contract, which lets you buy the shares for $100 and now sell them for $120.

However, the share price could have gone down to $80. At this point, you decide you don’t want the shares, so the person who owns the shares keeps your premium. Think of the premium as the fee or downpayment which gives you the right to buy the shares at $100 in the future.

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Summary: Can you make a living trading stocks?

As you can see, you can make a living trading stocks, but it is risky. Most new traders are inexperienced and make big mistakes. Losses are hard to recover from and you’re still responsible for paying capital gains tax, even if you lose money.

Day, Swing, Momentum, and options are all different trading styles. Day trading buys and sells shares in one day while swing trading holds shares for days to months. Momentum trading rides a successful stock and sells before it crashes. Options is a speculative investment where you have the right, but not the obligation to buy shares at a predetermined price.