August 11, 2010

  • Day Trading vs Investing vs Gambling, by soulfire

    Most articles and blogs that I've seen paint day trading in a negative light- associating it with higher risk and more akin to gambling compared to long term investing.

    I think it's high time we shatter these myths and misconceptions...

    Let's define the true risk of the market. Whenever you own stock, be it for a few seconds, minutes, days, or years, you are at RISK of the stock moving against you and you losing money. That's the bottom line. To eliminate risk, you'd have to be out of the market entirely.

    Now with that said, the shocking truth is long term investing exposes you to MORE RISK than day trading because a long term investor is in the market on a much longer time frame. A pure day trader closes all positions before the close of the day so when the market is closed they carry no risk while long term investors do. 

    The current situation at Hewlett Packard  illustrates this point. Last Friday after the market closed, HP announced that its CEO was resigning over an sexual harassment complaint brought against him which investigation showed improper charging of expense accounts. HP stock dropped 10% in after-hours trading and opened on Monday around that level. Who got burned with that stock drop? Not the day traders, who were out of the market, but rather the long term investors.

    Is day trading gambling? The next shocking truth is EVERY time you put your money in the market, it is a gamble to a certain extent. If there is risk of losing money, there is a gamble involved. Of course if your do your homework, the odds are much higher for your success on Wall Street than in Vegas.

    This brings up the question why do so many people perceive day trading as high risk and more dangerous than investing when we see it's not the case? I think it's due to the news highlighting people who have lost big bucks attempting to day trade. The thing is there are plenty of folks who have lost big bucks via long term investing as well but for some reason, the stigma only goes to day traders.

    Day trading has a higher difficulty than long term investing because of the shortened time frame. A long term investor can act in the time frame of weeks, months, years whereas a day trader acts in seconds or minutes. This means that the day trader MUST have an immediate plan of action and KNOW how to proceed based on a stocks movement. There is little time for hesitation. Day trading requires a level of discipline and awareness that most long term investors never use. Of course these skills are highly useful for successful long term investing as well, but long term investors usually have much more time to react.

    The bottom line is one may wish to avoid day trading due to its increased difficulty over long term investing, but it shouldn't be abnormally feared or negatively regarded as some type of gambling versus "safe" investing. 

    ----------------------------------------------------

    Thought of the day: A 12 yr old who won the Spelling Bee said, "In India, there is no second chance."  You get it or you don't.  Give this a thought if you identify yourself as a self saboteur.  Happy Ramadan~