Is It Possible To Make a Living Off Stocks?

Stock enthusiasts commonly wonder whether it's possible to make a living off stocks. The idea that you could quit your job and support yourself just by trading stocks may seem impossible to some, but it is possible to trade stocks for a living.

Novice investors, buoyed by their successes with paper trading, may take the leap of faith and decide that they're going to earn their living from the stock market. Some find success. However, many people who independently trade for a living use day trading strategies, and studies have shown that the majority of day traders lose money over the long term.

Learn what it takes to do trading as a career, and why it can be a financially dangerous career.

Trading Requires Discipline

Being able to successfully trade for a living means achieving a high level of focus and discipline. This is as opposed to traditional investors, who buy relatively safe products and let their equity grow over decades. The constant movement of stock prices on a second-by-second basis can be unnerving. You need to have a clear plan that you can stick to.

Get Educated About Trading

Spend some serious time educating yourself about everything related to trading. As a day trader, you should emphasize short-term strategies and the securities that work best with those strategies.

The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the IRS all offer valuable information for traders. Introductory books on strategies and theories will help you get acquainted with the playing field.

Once you understand the theories, products, and institutional players in the markets, spend some time testing your knowledge with a paper trading simulator. You shouldn't make the leap into a full-time trading career until you've maintained ample profitability through a variety of market conditions on a trading simulator.

Choose a Good Trading Strategy

To start trading, you'll need a sound trading methodology that takes advantage of volatility without forgoing risk management principles.  Again, this methodology should be tested over months or years and in all different kinds of market environments. Start with a demo account, then ease your way into trading with real money. Slowly swap out simulated positions with actual, risk-taking positions.

Set Aside Some Income

Many experienced traders suggest having at least one year’s worth of income set aside before you start trading. This is not the bankroll that you will trade with—you'll need separate capital for that. These funds should be set aside purely for living expenses such as housing, insurance, and food. Having this financial cushion will give you peace of mind, allowing you to begin your new career without the pressure of having to pay rent.

Even when it comes to capital for your brokerage account, day traders need significant capital to trade in earnest. FINRA has special requirements for pattern day traders, who are defined as those who open and close a position on the same day at least four times within five business days.

FINRA mandates that pattern day traders must maintain a brokerage account balance of $25,000. That's $25,000 on top of the year's worth of income you've set aside. In addition, you'll have to do your day trading in a margin account, although it isn't difficult for most traders to open this kind of brokerage account.

If you don't plan on day trading but you still want to make a living trading, you'll need to make every trade worth more. Since you won't be able to execute as many trades, each trade needs to be for a significant sum—and the more money you put into a trade, the more you expose your portfolio to risk.

Prepare Yourself Mentally

Professional traders need to leave emotion out of their trading. Psychologically, you will need to steel yourself for the severe financial losses that typically accompany the first few months of day trading. Learn from your mistakes without getting caught up in emotional highs and lows.

The goal when trading for a living is to have a reliable and consistent revenue stream, but that will take time, diligence, and luck to achieve. Not everyone has the mental fortitude to work up to the point where they have a consistently profitable strategy. Watching the daily fluctuations of your income can be extremely tough on the psyche, especially when it lasts months.

The combination of speed, volatility, adrenaline, and losses can make day trading a jarring experience for newcomers. You'll need patience and coolheadedness in the face of repeated losses; otherwise, the stress of day trading can wreak havoc on your emotional well-being.

Frequently Asked Questions (FAQs)