Think twice before day trading

The idea of day trading — buying and selling securities such as stocks many times throughout the day, perhaps holding them for only minutes or hours — can be appealing. You may hear of some people making a lot of money that way. But odds are, you haven’t heard about the many day traders who lose a lot of money.

Day trading can resemble gambling more than investing. Successful long-term investors often study a company’s fundamentals (such as revenue and earnings growth rates, profit margins, and cash and debt levels) before investing in its stock. They’ll also research the company to understand how it makes its money, how it compares to peers and what its risks and opportunities are. They typically aim to hang on to their shares for years.

Day traders, on the other hand, may not know any details about the companies they’re buying into and selling out of, such as what kind of business those companies do. When day traders do make money, their gains face the short-term capital gains tax rate. While the long-term capital gains tax rate is currently 15 percent for most people and 20 percent for high earners, your short-term rate is the same as your income tax rate — 22 percent-24 percent for most middle-class people, and as high as 37 percent for high earners.

Then there are trading costs. Though they can be very low, depending on the brokerage or trading platform used, paying less than a penny per trade can add up if you’re making hundreds of trades per day. Worse, many day traders trade with borrowed money, which can amplify their gains, but will also amplify their losses. Many lose much more than they invested in the first place.

You can amass great wealth without ever day trading. But if you’re still interested, read up on all the dangers — and stick to objective sources, not platforms urging you to trade. Multiple regulators and government agencies have issued warnings about day trading.