has already made a profit. But what he hasn’t thought about is his
trading costs, which total $80.
John’s trading costs—day 1:
3 initial purchases at $8/trade 3 sells at $8/trade
= $24 = $24
4 subsequent purchases at $8/trade = $32
Total trading costs
Let’s assume that John continues to day trade for two weeks. The second day he begins with the four companies he purchased on day one. He then sells them during the course of the day and purchases four more. This pattern continues for a total trading time of two weeks (10 trading days, with no extended-hours trading). John’s trad-
ing costs skyrocket to $656.
John’s total trading costs:
4 sells per day at $8/trade
4 purchases per day at $8/trade = $32/day
9 trading days at $64/day Day 1 trading costs
= $576 = $80
Perhaps during this time, John has been able to make at least $656 in profits from his trading activities. However, if he hasn’t, then he will find out that he has actually been costing himself money by engaging in day trading.
Currently, I have a handful of clients who prefer to do some of their trading on their own. They have separate brokerage accounts through my firm, but they handle all their own trading over the Inter- net. Through these accounts, they buy and sell whatever individual stocks they want, at whatever volumes they want. However, none of these people qualifies as a day trader because they aren’t actively trading all the time.
Trading costs are the immediate effect of day trading, but what about the long-term effects?At the end of the year, brokerage firms pre- pare 1099-DIV and 1099-B forms for all of their clients. These forms