MANY day traders out there in the big wide world who through their own intelligence,psychology and a thorough understanding of just how the Market Makers manipulate the prices make a great deal of money every single month - but on Yahoo it seems that day trading/penny stocks = bad which is just so puerile as the ONLY thing that makes traders lose are the traders themselves....
This is a form of leverage.
By buying on margin,
a trader borrows a large amount of money in addition to his own (equity)
As long as the return of his trade is higher than the interest rate that he pays on the borrow,
he can increase the return on his equity.
ROE = R
D/E * (R - i),
return on equity;
return of the trade;
interest rate paid on the debt.
It is easy to see that if R > i,
the return on equity is increasing as a result of the higher debt.
The problem is that the higher the leverage (D/E)
the higher the exposure to the interest rate risk:
if i increases above R,
the situation turns,
and the trader will lose big time.
In the recent financial crisis,
Wall Street firms used leverage to finance large trades with mortgage backed securities in an environment with very low interest rates.
Once the interest rates started to raise,
these trades turned sour and the high leverage exacerbated the collapse of the real estate markets;
investment banks were typically leveraged 40 time,
D/E = 40,
which ultimately contributed to the default of Lehman,
Bear Stearns and AIG.