Linsanity has struck.
As you may have read in countless news articles or on Facebook, basketball player Jeremy Lin has come out of nowhere to raise points dramatically on the scoreboard for the New York Knicks.
But those aren’t the only points on the rise because of Lin: The share prices for Madison Square Garden Inc., the company that owns the arena where the Knicks play in New York City, have been up this week as a result of Lin and his team’s recent successes. As we watched MSG's stock rise, we started thinking about who else benefits from this turn of fate.
Aside from Madison Square Garden Inc. and the retail stores that sell Lin jerseys (at least until they sell out), some unlikely people stand to benefit significantly from the stock's upswing: namely, day traders.
Really? How do a basketball player's layups and dunks turn into Wall Street money? Here we'll dive into day trading--and whether you should consider it.
What Is Day Trading?
Day trading can either be an occupation or a hobby. Day traders hold stocks for a short period of time, buying and selling stocks throughout the day to capitalize on changes in stock prices. Most day traders believe that the best strategy is to not hold stocks overnight, which leaves them vulnerable to overnight price movements (and potential losses). So, they buy stocks during the day, betting on whether they'll rise or fall, then sell them off.
Stocks don't need to make enormous gains or losses for day traders to turn a profit. If a day trader owns enough shares of a company, fluctuations of even pennies can make a trader thousands of dollars in a day. At the same time, though, making the wrong bet—assuming a stock will rise, only to see it falter and fall—can lose a day trader thousands of dollars just as quickly.
How Day Traders Turn the News Into Profit
Day traders scan the papers and do intensive research on companies because their bets depend on liquidity and volatility.
In this context, liquidity means that there will be plenty of people looking to buy the stock when you want to sell it, so you can make a profit. (As long as Lin and the Knicks continue their winning streak, there's a good chance that people will be interested in purchasing shares of Madison Square Garden Inc.) And good volatility means that the stock’s price will likely rise or fall throughout the day according to your predictions.
In the case of Madison Square Garden Inc., a day trader might predict that the stock will rise throughout the day, so he would buy shares, wait for them to rise, and then sell them for a profit. But, if another day trader thinks that the Knicks might lose their next game, he might "short" the stock, or bet that the stock price will drop, to turn a profit. (To find out how shorting stocks works, read this, and then test your knowledge with this quiz.)
Basically, day trading depends on taking calculated risks every day. There's potential for a huge payoff if you bet correctly, but as any gambler knows, a wrong bet can mean equally huge losses.
Our Take on It
Here at LearnVest, we don’t advise you to buy individual stocks, which can rise and fall dramatically due to the company’s performance and many factors you can’t foresee. We instead recommend spreading your risk around and investing for the long term, rather than trying to make money quickly off of a single company’s rise (which leaves you susceptible to losing money just as rapidly if that company falters).
Additionally, we believe investing is for the long term—not to make a quick buck. We never advise day trading because it’s so inherently risky: There’s a good chance you might lose your entire investment in one day, which is an irresponsible use of your hard-earned money.
To find out more about safer investments, read about ETFs, which track the performance of markets as a whole, so you’re not dependent on an individual company. Or learn more about mutual funds, another traditionally safe investment.
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