Sunday, April 15, 2007

Day Trading: How Risky Is It?

I visited my brother-in-law the other day, and he told me about how he has been day trading stocks since January. My initial thought is that this is a rather foolhardy thing to do, since it is considered by many to be quite risky. His current strategy is to focus on one stock only, Exxon (XOM). He watches this stock all day and trades several times a day. Year-to-date he has made approximately $23,000 after trading fees from Scottrade.

My brother-in-laws disclosure makes me ask some questions regarding day trading:

  1. How risky is it? What is the general consensus regarding this risk?
  2. Do people exist that consistently beat the market?
  3. How do you account for your gains and losses with regard to taxes?
  4. What is the most cost-effective platform for day trading?

The Securities and Exchange Commission (SEC) has this to say about day trading:

“Day traders rapidly buy and sell stocks throughout the day in the hope that their stocks will continue climbing or falling in value for the seconds to minutes they own the stock, allowing them to lock in quick profits. Day trading is extremely risky and can result in substantial financial losses in a very short period of time.”

The Wikipedia entry for day trading gives some more precise figures with regard to risk:

“It is commonly stated that 80-90% of day traders lose money. An analysis of the Taiwanese stock market suggests that ‘less than 20% of day traders earn profits net of transaction costs’.[5]

It is telling that among legendary investors, such as Warren Buffet or Peter Lynch, there is not a day trader. Investopedia sums up the risk aspect of day trading nicely:

“Although it is becoming increasingly popular among inexperienced traders, it should be left primarily to those with the skills and resources needed to succeed.”

This will conclude my post on day trading for today. I will address the tax aspects and trading platforms in a later post.

Technorati tags:
, , , , , , , , , ,

No comments: