Day trading is risky

Are you planning to get rich by jumping in and out of lots of stocks many times during a day, and racking up gobs of small gains? If so, you’ll be day trading — and you’ll likely lose much or most of your money.

Day trading can look like investing, but it’s really gambling. Day traders tend to spend hours glued to monitors, watching stock-price graphs, placing scores of orders each day and holding each stock for a few minutes or hours. They often ignore company fundamentals (such as revenue growth rates, profit margins and debt levels) and may not even know what various companies do. They face headwinds such as trading costs that add up and short-term capital gains tax rates, which tend to be higher than rates for long-term gains.

A study by the North American Securities Administrators Association suggested that some 70 percent of day traders “will almost certainly lose everything they invest.” Meanwhile, the Securities and Exchange Commission (SEC) has warned against day trading, saying, “Day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status.” It also noted that many day traders use borrowed money, magnifying risks and making it more possible to lose all their money and end up in debt. The SEC urges investors to not believe claims of easy profits and to understand that many sources of hot tips have been paid.

Those who’ve made the biggest killings in day trading may be the ones who run firms, providing day traders with trading equipment and charging commissions per trade.

Successful long-term investors study businesses, carefully select stocks and aim to hold on for years. They consider themselves, rightly, as part-owners of real businesses. They can tell you how the companies they’ve invested in make money, and why they expect them to grow.

Resist any temptation to buy and sell stocks rapidly in large numbers. Don’t let yourself or anyone you care about get sucked into day trading.