How to Make Money Day Trading

By Selena Maranjian | Montley Fool

Frankly, I'm tired of hearing how dangerous and unprofitable day trading is. After doing a little research, I've found several ways to make good money at it.

But first, a little background
By "day trading," I'm talking about folks who buy and sell stocks rapidly during the course of a day, often hanging on to each one for mere hours or minutes. When they want to make money, day traders often pursue companies with high "betas" -- businesses that are more volatile than the overall market. To illustrate, I've assembled a few high-beta companies below:

Company	Market Capitalization	3-Year Beta Avg.	Recent Stock Price*	3-Month Avg. Daily Volume in Shares*
Conexant Systems	$221 million	3.00	$3.39	2.68 million
Powerwave Technologies	$169 million	3.29	$1.27	1.15 million
Ambac Financial(NYSE: ABK )	$150 million	2.74	$0.52	10.85 million
Borders Group (NYSE:BGP )	$124 million	4.07	$2.06	2.70 million

Data: Motley Fool CAPS, Yahoo! Finance.
*As of March 26.

The most volatile stocks in the market are often "penny stocks," which trade for $5 or less per share, like those above. With its beta of 4, Borders could rise four times as fast as the market if its shares begin to rise. Day traders like that potential for speedy gains, since they hope to ride each volatile stock for only a short while.

Now, contrast the pennies above with more familiar names from the venerable Dow index:

Company	Market Capitalization	3-Year Beta Avg.	Recent Stock Price*	3-Month Avg. Volume*
Boeing (NYSE: BA )	$53 billion	1.28	$72.59	6.34 million
American Express (NYSE:AXP )	$49 billion	2.26	$41.12	9.65 million
Kraft Foods (NYSE: KFT )	$45 billion	0.59	$30.34	21.41 million
Disney (NYSE: DIS )	$68 billion	1.19	$35.31	12.41 million

Data: Motley Fool CAPS, Yahoo! Finance
*As of March 26.

These companies' betas vary widely, and their stocks trade for far more than $5 a share. (In fact, when stocks fall to a few dollars or less per share, they're in danger of being booted from the Dow, as happened to Citigroup (NYSE: C ) .) Kraft's beta is especially low, which would make it particularly uninviting to many day traders.

Also, note these companies' trading volume, which can both attract and reflect day trading activity. The raw number of shares traded may be generally higher on Dow stocks. But given their relative size (around $200 million vs. many billions), the penny stocks see much more trading activity as a percentage of their market capitalization.

Where the money is
If you think that the first group of stocks presents a prime pool of potential day trading profits, you're wrong. There's actually an 80% chance you'll fail at day trading. So how can you make money at it?

For starters, you could join the companies selling $4,000 day trading seminars, to teach people how to do something at which most of them will fail. Alternately, sell trading software or research services to further capitalize on that likely failure.

If you'd like an even juicier return, run a brokerage that gets paid commissions for every purchase or sale a day trader makes. Even at a cost of just $1 per trade, 30 trades per day for 200 days per year will amount to $6,000. To further increase your profits, let day traders borrow from you on margin. You might make more than $2,000 annually in interest payments on every $25,000 they borrow.

And if all of that sounds like too much work, you could always just be the IRS. The agency taxes day-trading profits at ordinary income rates, because they're short-term capital gains. Day traders in a 28% tax bracket will pay $14,000 on $50,000 in gains -- as opposed to just $7,500, if they waited for favorable long-term capital gain rates to apply.

In short, the only people reliably benefiting from day trading are those who don't actually day trade. You're much more likely to profit by taking your time, doing your homework, and finding well-run companies with real competitive advantages. You might not get rich quick, but you'll stand a much better chance of getting rich, period.