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While Day Trading has emerged as a wildly popular phenomena, it's risks should not be underestimated.

Arthur Levitt, Chairman of the Securities and Exchange Commission issued a statement to investors on January 27, 1999 concerning the risks of on-line trading. In his statement, he encouraged investors to not lose sight of what he referred to as the "three golden rules for all investors":

1.   Know what you are buying.

2.   Know the ground rules under which you buy and sell a stock or bond.

3.   Know the level of risk you are undertaking.

Mr. Levitt stressed in his communication that investors often don't realize the speed at which the market can move. Many investors are caught off guard by rapid price movements and get trapped in losing positions. The increasing tendency of investors to buy securities on margin was also a concern. Leveraged investment positions can lead to catastrophic losses if the market turns against you.

The National Association of Securities Dealers, Inc. (NASD) Board of Governors echoed Mr. Levitt's concerns as it issued its "NASD Regulation to Solicit Comment on Proposed Rules for Day Trading Activities" on March 25, 1999. In an effort "to ensure that investors are better informed about the risks involved before engaging in high-risk investment activities like day trading" the NASD issued a proposal that prospective day traders be fully educated on the potential risks of their activities. These disclosures, according to the NASD should include at a minimum the following points:

1.   That day trading can be extremely risky.

2.   That customers be cautious of claims of large profits from day trading.

3.   That day trading requires knowledge of securities markets.

4.   That day trading requires knowledge of a firm's operations.

5.   That day trading may result in large commissions.

6.   That day trading on margin or short selling may result in losses beyond the initial investment.

While the potential rewards for successful day trading can be impressive, the risks are substantial. No one should enter the day trading arena with money that he or she cannot afford to lose. If you believe that Day Trading is for you, just make sure that you go in with your eyes wide open and with a full understanding of the risks involved.

What are the Capital Requirements of Day Trading?

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