Last updated on August 23rd, 2022 at 05:53 am
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With the steady increase in financial literacy and the increasing accessibility of stock trading, more people are entering the stock market. And with easy-to-navigate apps and websites such as Robinhood, casual stock trading and day trading are booming.
But can these day traders be successful and make money, or are they falling victim to a “get rich quick” mindset?
Most day traders are not successful. The ones that do become successful (which are not the majority) can thrive and make substantial profits.
Those within the stock market community often view day trading as incredibly dangerous and glorified gambling. While this might be true (especially for beginners) many traders have developed strategies that work for them over a long period of time.
So although few day traders are successful it certainly is possible.
As inconsistent as they may be, these day traders are beginning to have significant power in the stock market today. Read on to learn about their success and how they are changing trading as we know it.
Reasons Most Day Traders Are Not Successful
In most cases, day traders utilize strategies in which stocks are purchased and sold, all in one day, hence making them day traders. The whole idea behind day trading is that the trader will buy a stock at a set price and almost immediately (within minutes or hours at most) turn around and sell the stock for a higher price.
In most cases, a trader will only make a profit of a few cents a share, which is why most traders don’t engage in day trading.
To make any money, day traders would need to have large sums on hand for trading every day. Thus, to reduce this cost of investment, traders will often opt for cheaper stocks or even using options.
In most cases, this comes in the form of penny stocks.
Any stock less than $5 often goes for as cheap as $0.01 to purchase. That means if you invest just $100 into any given stock that trades for a penny, and it was to rise by only one cent, you’d make $100 on one trade, and thus doubling your investment.
While this seems like an absolute win and something easy to reproduce, this strategy has a serious issue. While you only need one cent to double your investment, you only need one cent to cut your original investment in half.
For this reason, day trading is incredibly risky.
Additionally, because these stocks often belong to small companies and are so cheap, there is almost no way to predict how these stocks will trend. This means you are putting blind trust into something you can not predict.
For this reason, many in the stock market community have called day trading the same as gambling.
Kevin O’Leary, the famous Shark Tank investor and Chairman of O’Shares ETFs, said, “Day trading is not investing. Day trading is gambling. Nothing wrong with it. Nothing wrong with Las Vegas either. But it’s not investing.”
Plus, considering the fact that the success rate is only about 3.5% to 4.5%, it definitely is not a safe form of investing.
In theory, however, if a stock were to increase substantially in one day, and the day trader made the right choice, they could make a massive profit.
Suppose a trader bought a stock at $0.05. If they invested $100 at this price, thus purchasing 2,000 shares, and the stock’s value was to rise 20% to $0.06, the investor would make $20 on this one trade, over one day, alone.
If this were to be replicated in six other trades, five days a week, that would make a weekly profit of $840, enough to reinvest eight times over.
Though it rarely happens, some traders can make a significant amount of money, with some of the highest earners making well over $100,000 a year. However, it is important to note that most of those day traders who do well financially have a finance background or work for a brokerage firm.
Day Traders Taking Over – The Effect On The Larger Market
Even though day traders may not be involved in the market for very long, economic activity is economic activity. This means, though it may be small, these days, traders have some effect on the stock market at large.
Because these traders invest so much into such a small, specific area, they can cause serious market volatility within these small areas.
This is especially true when a stock already has some degree of movement. If a stock’s price has been moving upward consistently for a number of days, day traders take note and may purchase the stock, wait for it to rise, and then sell it.
If enough traders are doing this enough times, then the traders alone can manipulate market forces, causing them to rise and fall. As a result, these traders can make more money.
While this is not necessarily a bad thing, it can make things complicated when a stock’s direction is completely changed as a result of these days traders.
In recent years, for example, a number of stocks went through serious changes because of day traders.
These changes, absurd in the eyes of most, go to show the power of day traders and casual investors. Whether desired or not, these days, traders are here, shaking things up in the finance world, and are likely here to stay.
Despite the fact that day traders are not often successful, day trading is growing and changing how the stock market works. Day traders are making the stock market more accessible and are engaging in trades with the ultimate goal of challenging Wall Street.
While the day trading movement may be an effective way to institute change to the finance sector or influence how companies do business, it is not a sound investment strategy.
Basically, day trading is an enhanced form of gambling. There is a place for this in society, but as an investment strategy, it is dangerous.