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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Scalping

What it is:

Scalping is a form of day trading that involves earning small profits on large volumes of securities.

How it works (Example):

A day trader is a very active securities trader who holds securities for a very short time (generally one day or less). If a day trader wants to scalp, he or she would buy and sell shares when there are small changes in the stock price. For example, if the price of Company XYZ rises from $41.50 to $41.55, the difference is only a nickel. To most investors, that's not a compelling change, but scalpers capitalize on this by buying 100,000 shares at $41.50 and selling at $41.55 for a profit of $5,000. If this price change takes place in the course of just one trading day, which is entirely possible, the trader can make $5,000 in a day. Often, the price changes are even smaller than $0.05 a share for scalpers to profit.

Why it Matters:

Scalpers execute most of their transactions online, and it is important to note that the number of trades influences the amount of brokerage commissions paid. Some day traders avoid using market makers or brokers by purchasing memberships in direct-access broker systems. These systems send orders to an electronic communications network (ECN), which is a computerized matching system that allows traders to advertise bid or ask prices and execute trades.

Day trading requires analytical skills and discipline, and many people have made day trading a career. However, day trading is exceptionally speculative and therefore requires considerable financial and emotional stamina to withstand substantial risk.

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