Many investors tend to think of the stock market in terms of big gains, both in the short and long term. We have Tesla and GameStop, among others, to thank for that. But even small returns can add up, which is where stock scalping stems from.
Scalping stocks is mainly used by day traders to reduce risk, and it has its place—although it isn't immune from financial hazard.
What it means to scalp stocks
Scalping is an investment strategy under the day trading umbrella. Instead of aiming for big gains, scalpers seek small returns. To boost the outcome, they will trade large volumes of a security. Large volumes combined with small returns equals big gains.
Easy enough, right? Theoretically, stock scalping is extremely effective. However, it requires timing the market just right. While small returns can add up, one big loss can wipe out a whole slew of successful scalping.
How scalping differs from swing trading
Swing trading is an investment style where traders will stay invested in a security for a few days or a few weeks.
Usually, swing trading is more technical. Investors involved in this strategy will use charts and analyses to see where a stock is at, which gives them enough time to make an educated exit. This strategy requires a lot of knowledge about stocks, including where they might be going in the coming weeks. For example, a swing trader might base their investments off of earnings dates for companies expected to increase their EPS.
Scalping typically occurs on a day trading basis, but it isn't a WallStreetBets-style initiative. Understated returns (but returns nonetheless) are the name of the game.
Consider fees in your stock scalping strategy
Small returns are great until commission fees and expense ratios eat away at them. That's why a lot of scalpers trade in large volumes. They aim to combat those fees with a higher share volume in a single trade.
Most online brokers charge a commission fee for options trading. Scalping can be applied to options as well, so it's worth noting. Additionally, ETFs and other types of funds charge expense ratios. Actively managed funds run around 0.5 percent–0.75 percent. Passive funds carry lower fees, usually around 0.02 percent–0.2 percent. If you're planning on scalping an actively managed ETF, you might want to do some calculations to determine what return is high enough to combat those fees.
Potential risks in stock scalping
The potential for losses here is obvious. As a trader, you might want to set a limit order when buying stocks to keep yourself from investing at a higher cost basis than you wanted.
Once you have the stocks in your portfolio, a stop loss might be useful. This tactic gives your portfolio the go-ahead to sell a stock once it gets to the loss you set. For example, it could ensure that you lose just five percent rather than 10 percent.
As a day trading tactic, stock scalping isn't allowed on all brokerages. Some brokers require you to get approval before day trading. If you ignore warnings, you could lose access to your account.
Do you have the time for stock scalping?
Scalping stocks requires a lot of time, ideally a few hours each day. These hours must be within the market's hours (U.S. exchanges run from 9:30 a.m. to 4:00 p.m. ET every business day). If you don't have the time to commit, you might want to reconsider how often or if you want to scalp.