Understanding the Recent Surge in Day Trading
01 September 2020
The early online trading days of the 1990s proved that day trading — the practice of buying and selling stocks throughout the same day — may not always be a financially healthy hobby. A prevalent mindset at the time emphasized that people found a responsible way to supplement their incomes. We soon discovered this outperformance was largely due to luck during a bull market (in other words: rising market, sound economy — often a recipe for success).
While day trading did not entirely disappear with ’90s history, along the likes of Chambawamba and Slap Bracelets, there’s something about the approach that has regained the spotlight in unprecedented ways these past few months. The Wall Street Journal recently uncovered a new explosion of the practice since the COVID lockdowns began. Apparently, we are in living in the perfect incubator for day trading:
- More free time in isolation
- Easy access to technology
- Reduced incomes
- Bull market
Teens and retirees are especially susceptible to this potentially risky idea that could greatly affect their financial health. So, if a friend of yours has been encouraging you to “play the market” or if you have an adolescent using a free trading app, here are three reasons to avoid taking up day trading as a COVID lockdown hobby.
Day traders are enticed by the use of a derivative called stock options. It’s an advanced, complicated way to trade. And they may actually open yourself up to unlimited losses.
If a person buys a share of a stock worth $100, we generally understand the maximum loss to be $100. But if they sell an unprotected call option on a stock, their maximum loss could be infinite. Young day traders have been confused about this concept and it has led to unnecessary stress during already hectic times. With younger generations being especially apt to chasing instant gratification, we need to ensure they are not day trading options before learning to ride without training wheels.
Becoming an advanced investor, realistically, may not quite live up to its mystique. It’s not like the glamourous scenes in The Wolf of Wall Street — it requires a lot of preparation and constant effort such as learning how to analyze balance sheets and cash flow statements in order to avoid trading according to one’s biases.
The highest trading stocks on Robinhood, an app commonly used by day traders, seem arbitrary. GoPro and Tesla, for starters, may be products of familiarity bias. When you don’t do the work, you won’t always know how to identify underpriced stocks. Instead, you might simply purchase stocks you are most familiar with. But this doesn’t always mean the popular brand is a better investment. While day traders may openly brag about investing simply according to their biases — such as claiming that $0.50 stocks are safer than $50 stocks — there are likely more sound investment philosophies out there.
Retirees are especially vulnerable to the pitfalls of day trading during this unusually difficult climate, especially if they’re trying to fill their time by socializing online. Plus, investments with good yields may be especially scarce right now, while sizable day trading losses are inevitable. And the consequences imply more than just a hit to retirement savings. Experiencing a large loss can permanently scare retirees from investing. If a retiree were to experience a sudden loss early in their day trading career, they may feel the snakebite effect and hold cash throughout retirement.
If done in a healthy way, investing can help grow wealth or keep up with inflation. Day trading just might not be the most rewarding retirement hobby. If you find investing to be a strong interest of yours during retirement, that’s great. Just make sure you are incorporating plenty of other active leisure activities and interests that foster days of fulfillment.
Investing can be a responsible adventure — but money and emotions are intertwined. That’s why investing should promote wellness. By picking an investing strategy that works over a long period and promotes well-being, you can more easily avoid ill-advised fads.
While proven strategies don’t provide the instant gratification that a day trading app might, there are reasons why the world's most successful investors aren't treating the stock market like it’s merely a game on their smartphones. When it comes to accomplishment and abundance, hard work and dedication to one’s values are often the elements that make for greatness.