I daytraded during the NASDAQ bubble. It was wild times but to be honest I made most of my money off one stock: AMD. The way I did it wasn’t through buying and holding…for the most part.
First of all, I knew AMD’s stock would go up a lot because 1) their product was going to surprise people by competing against Intel and 2) everything under the sun was going up in value at the time. One could actually make more money on a hotter stock, but for me AMD worked because I was pretty confident that it would. If you just chose some random stock in a business you don’t know as much about, you might not be so lucky. You might wake up and see your stock trading down 50% in pre-market. (an argument for closing out trades at end of day, i.e. day-trading, as limiting risk)
Anyway, if a stock is trending up, and it is marginable, then you can keep upgrading your shares. For instance, say you start off with $10,000. You can buy 1,000 shares of a $10 stock without using margin. But if your account is a marginable account, then usually you will get 50% margin. So your broker will double your account’s value to $20,000, which will buy you 2,000 shares of that $10 stock.
Say you buy on May 1st and sell on June 1st after the stock’s gone up two points to $12. You make a profit (excluding fee) of $4,000 (2×2,000).
You now have $14,000 in your cash account, or $28,000 marginable. The reason is because you keep the full profit you made, $4,000, not just the half that you yourself paid for.
Now the next day, when your trade is settled, you can buy 2,333 shares of the stock on margin. You buy at $12 and sell on July 1st again at $15. And so on…
Month 1: Start with $10,000, or $20,000 on margin. You buy 2,000 shares and price goes from $10/share to $12. You make $4,000. 4,000+10,000=14,000.
Month 2: Start with $14,000, or $28,000 on margin. You buy 2,333 shares and price goes from $12/share to $15. You make $6,999. 6,999+14,000=20,999.
Month 3: Start with $20,999, or $41,998 on margin. You buy 2,799 shares and price goes from $15/share to $17. You make $5,598. 5,598+20,999=26,597.
Month 4: Start with $26,597, or $53,194 on margin. You buy 3,129 shares and price goes from $17/share to $20. You make $9,387. 9,387+27,865=37,252.
So you can see how quickly you ramp up this way. After only 10 points, you’ve made $27,252 (approximately, since I scrapped the remainders after trades). You would’ve only made $10,000 by holding. Because you are sharing the broker’s margin but receiving the full profit, you’re receiving a multiplier effect the more you trade. Look at the number of shares you are owning after each step. It goes up faster and faster.
This does, of course, assume you’ve found a trending stock (which do come along quite often) which you can piggy-back off of. This is common in overlooked tech stocks which popular culture is down on but which are picking up. Imagine using this technique on Apple (AAPL) after the iPod started selling like hotcakes!
For example, I knew Nintendo would appreciate in value. I bought some at $18ish and $22ish. It is now $60ish. The only problem is that the stock is only a derivative of the Japanese stock, and is therefore unmarginable in US markets. So I’m only allowed to buy shares with cash on-hand.
With margin of course there’s a large risk if the stock goes down. But if you’re willing to take the risk, and you pick a stock with underlying fundamentals which are unquestionably positive (such as exponential observable growth of sales, like iPods or AMD chips), then bad news is not likely to come. Plus, you can use technical indicators like trendlines to sniff for future problems.
Back when I was bored in my business classes in college, I read for fun the “Reminiscences of a Stock Operator”, written by Edwin Lefevre, a speculator in the 1920’s before the stock market crash. Here is what he said:
When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stock on a scale down. I buy on a scale up.
Remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don’t make a second unless the first shows you a profit. Wait and watch.
Most people try to buy stocks when they dip to catch the bottom. “Don’t catch a falling knife,” they say. What Lefebre was saying was that you know quickly whether a trending stock is a winner or not. When you make a profit, keep adding.
Timing the market is impossible in the long-run, but this technique takes advantage of margin. It helped me turn about $15k into $80k. I lost some of that money when AMD stopped running, and when I started to try to daytrade. As I quickly realized, I don’t have what it takes to be a daytrader. =P