Day-trading sounds exciting, but unless you have a very good grasp on what you're doing, you stand a great chance of losing big.
Star Trek’s noted physician, Bones McCoy, was famous for going on rants when asked by Captain James T. Kirk to perform miraculous health transformations. To wit: “Damn it, Jim, I’m a doctor, not a magician!” I was reminded of this a few weeks ago, while riding an elevator at a healthcare conference, when I overheard one physician tell another, “I’ve been having some good success day-trading.”
I didn’t have access to the doc’s portfolio handy, nor was I inclined to ask for it, but I was tempted to chime in with a quote from another famous Hollywood character, The Princess Bride’s charismatic swordsman Inigo Montoya: “You keep using that word. I do not think it means what you think it means.” Here are a few things to keep in mind if your possession of an E*Trade or AmeriTrade account has you feeling like you could get rich quick.
What is a day-trader?
True “day-traders” are expert investors who spend a great deal of time and an inordinate amount of investment savvy to identify short-term growth stocks that can be bought and sold in a single day, hopefully at a profit. Magnified by each day and over many transactions, this can be a profitable endeavor. Day-traders buy and sell stocks rapidly during the course of a day, often hanging on to each one for mere hours or even minutes. The stocks they invest in—typically “penny” stocks—are highly volatile.
In the wrong hands, and without that time investment and savvy, and sometimes even because of simple bad luck, day-trading can be a dangerous thing. Some estimates indicate that as many as 80% of people who try true day-trading wind up losing all or most of their investment. Why? Because volatile stocks are volatile for a reason. Perhaps they’re start-ups, or perhaps there are other economic factors that could encourage significant up or down movement in their value over short periods. Most investors are not equipped to properly value these stocks and “predict” whether their value will go up or down.
Having a little fun?
Your parents and their parents didn’t day-trade, both because they were wise and because they simply didn’t have access to stocks and bonds except through a broker. The early 1990s appearances of online brokerage services for self-directed investors opened up doors that made it easier, and much less commission-heavy, for individuals to make buy and sell decisions. But easier isn’t always better.
There is nothing wrong, of course, with allocating some small portion of your savings and investments to a self-directed account. Many investors have made good returns this way, and it can still be done with a focus on your larger investment goals. Just don’t confuse it with day-trading, and don’t engage in it as your only investment strategy.
A Better Investment Strategy
So, what’s a better investment strategy than day-trading? Name another investment strategy. More specifically, take your time reviewing your investment goals, consider more stable vehicles, trust (but verify!) your financial advisor’s suggestions, and invest in well-run companies with distinct and long-term competitive advantages.
That strategy may last you a little longer than a day.