Downsides to Day Trading

It is silly and irresponsible to day trade, there I said it. Now let me show you why it might have appeal and then I'll show you why it is stupid.

It has the glamour of being on Wall Street from the comfort of your home. The day trader can watch market news all day, read the latest rumors, and then decide to put money toward what he thinks the market will do on that information. It also has the potential to make a trader very wealthy in a very short time. And with little capital a bet could return 100s of percents in a few months. No other way to invest has that probability in actuality.

The above reasons almost make me want to gamble my own savings and investments to retire even earlier with large piles of cash made quickly and easily. It seems easy, people on tv and the internet talk about how the strategies work and are sure-fire ways to increase returns from small investments. The problems of course are many. One is the problem that lots of the returns are consumed from extra taxes and commission fees. The income is taxed at the ordinary income rate rather than capital gains. Let's say you trade 400 times a year at a cost of $8 a trade that is $3200 a year given to the brokerage house for the privilege to trade. 400 is a small number too because if you are day trading then you need to trade probably more than twice a day. Each trade decreases your actual return while making other people richer from your trades. Unless you have a large amount to big with to trade it is not worth it to day trade and give up such a large percentage in trading fees. Although the brokerage houses will want you to trade more and therefore will try and convince you otherwise. Do not fall into their trap, stay strong and stick with a buy-and-hold strategy. It will pay off in the long term with fewer fees and taxes.

With day trading, the trader has to know direction and timing of the stock. Its already hard to decide if a stock will go up or down based on all the factors that can move a stock and so it is extremely risky to day trade because you are taking on all the unknown factors. It can make you wealthy but I would not do it with any sizable portion of your money and I wouldn't bank on it for retirement. Way too dangerous for the long term and a trader shouldn't want to take on more risk than necessary to get a reasonable return.

Just stay away from day trading. Chose some good companies invest monthly in those and wait for the rewards to come. it might be a few years but they will be there.