Here's what to consider before getting into day trading
As unemployment claims grew and fears over the coronavirus pandemic lingered, many market watchers were bewildered as stocks continued to rally, seemingly unconcerned.
One hypothesis for the jump was that millions of everyday investors had flooded the market since March, buying the dip in stocks, and have since helped boost the fortunes of stocks, even those belonging to companies filing for bankruptcy protection.
Many of these day-traders are using the mobile app Robinhood, which gained more than 3 million followers this year. But other brokerages have seen a rise. Charles Schwab experienced an all time record of more than 600,000 accounts registered this quarter, with more than half of new clients 40 and under.
The hypothesis — whether or not it’s true — has put the spotlight on day trading, when you buy and sell a security within the same day.
“The concept of day trading — purchasing investments early in the day and selling out by the end of the day — can be very difficult,” said Peter Hoglund, senior vice president at Wealth Enhancement Group. “And very likely to hurt an individual investor using their own money.”
It also contrasts heavily with the advice of financial advisors and market moguls alike, such as Warren Buffett, who believes in a buy-and-hold strategy for longer periods.
For instance, investors who bought securities tracking the S&P 500 index on March 9, 2009 at the bottom of the bear market during the Great Recession and held it until last Friday, could have seen a gain of 349.55%.
Don’t be that friend
“A friend of mine was trading over $700,000 and he wanted to pay off his home so he doubled his money,” said Alexander Koury, certified financial planner at Hosler Wealth Management. “Last time I checked, he was down by $150,000.”
Rob Greenman, lead advisor at Vista Capital said the probability of making profits with day-trading is about 1 in 2.
“Day trading is a risky proposition,” Greenman said. “Over the past 20 years, stocks have declined on 47% of all trading days. That’s about a coin flip chance you’re going to win or lose.”
What should investors consider instead?
If you have free time and money to invest during the quarantine, consider investing in the markets but not at the frequency of day-trading.
“The only real winners in the day-trading scenario are similar to the real winners in Las Vegas — the house,” said Greenman. “The real winning strategy is one that is simple, but not easy: Getting invested and keeping your hands out of there! Investment returns are like a bar of soap: The more you touch it, the less you have at the end.”
Another strategy before engaging in day-trading is to assess your own financial situation and see if you can afford the risk.
“Speculative investing, or looking for investments that the market undervalues and you expect will significantly rise, has some merit for some investors, but should not be entered into lightly,” Hoglund said. “Be honest with yourself about both your successes and your failures. Understand that this type of investing takes both expertise and serious work and dedication, and if you intend to give up, be willing to return to a diversified strategy.”
Dhara is a writer for Cashay and Yahoo Money. Follow her on Twitter @dsinghx.
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