Thinking of Day Trading? Know the Risks.
By Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy
There has been a lot of talk recently about day trading. Some tout it as a way to make big money fast and others have unfortunately fallen victim to the risks of engaging in this type of speculative investing. If you are thinking about day trading, I urge you to think again. Day trading is serious business and not something you just dabble in for fun, particularly if you are using leveraged investment strategies or trading leveraged products.
Whether you’re just starting out or you’re a seasoned investor, day trading is a complicated and risky form of investing. Bottom line−unless you understand the risks you’re taking, and the economics and performance of leveraged investment strategies, such as trading on margin, or using options or leveraged products, you should not engage in day trading.
Day trading involves actively buying and selling securities within the same day, trying to capitalize on short-term changes in price. Those involved in day trading often borrow or leverage capital each day in order to purchase additional assets−but it also substantially increases your risk. This sophisticated level of investing requires meticulous market and news monitoring, is fast moving, and involves a large amount of speculation. Professional day traders are typically very experienced and have a deep understanding of the markets, products, strategies, and the risks. Before engaging in any type of day trading it’s crucial to understand the considerable risks involved.
The Latest Craze
Some celebrities and high profile individuals have been vocal about how they have made a lot of money in day trading. Some may use day trading as a way to fill an entertainment or similar void while other activities, like sports betting, currently are limited. Just because some celebrities are engaging in this kind investing, doesn’t mean it’s the right investing strategy for every investor. Every investment involves some degree of risk; however, engaging in risky trading strategies, particularly those involving leverage, is not the best way to plan for a strong financial future. While it may be exciting and tempting to jump into the latest investing craze, I strongly urge you to take a more balanced and long term approach to investing.
You Can Lose Everything and More…
Day trading is not for the faint of heart as it involves minute to minute decision-making, as well as leveraged investment strategies that can lead to substantial losses. The goal of this kind of investing is to profit from daily short-term market and stock price changes. The risks involved, however, are substantially higher than longer-term investing strategies. A lot can happen during the market day that can result in market and stock volatility that can be a challenge for even the most experienced day trader.
It can be especially difficult to check your emotions at the door when making investment decisions in this kind of environment, which may lead to some costly financial mistakes.
Day trading often involves sophisticated products, and day traders often use leveraged investment strategies. Leveraged investing involves using borrowed capital to purchase stocks or other securities. Some examples of leveraged investing include sophisticated products, such as options trading, and margin trading. Leveraged investing may increase a day trader’s profit if a stock’s price or the market moves in the right direction. However, using a leveraged investment strategy is very risky, and the risks involved may not be apparent to you at first.
If a stock’s price or the market moves in the wrong direction, it can result in very quick and substantial financial losses. Leveraged investing can even result in losing more money, and in some cases substantially more, than initially invested. Leveraged investing in a fast-paced and complicated environment can be very tricky, and it should not be done by inexperienced investors.
Unless you completely understand the magnitude of the risks involved and are able to live with those risks, you should not be considering these kinds of investments.
It’s important to understand your level of risk tolerance when making any kind of investment decision. When developing your investment plan and considering risk, think about your investment objectives and experience, time horizon, current financial situation, and aversion to losses. If you aren’t a risk taker and want to sleep well at night, day trading probably isn’t for you. Everyone has different risk tolerances and only you can decide what’s best for your financial future. If you need help determining your risk tolerance, check out the risk information on Investor.gov or ask a financial professional.
Long Term Investing is Best
Investing for the long term is the best way to secure a strong financial future. When you’re creating your investment plan, it’s important to identify your financial goals, such as saving for a house, your children’s education, and retirement. Then, you need to think about how much you need to invest to achieve those goals. Creating a plan that spreads your investments across a mix of stock, bonds, and cash can be a strong strategy. Diversifying and including various kinds of investment products across different types of industry sectors in your portfolio reduces risk and the impact of volatility on your overall portfolio.
Understand What You’re Investing In
Day trading can move very quickly and you may not have time to research every investment thoroughly. Take your time and don’t ever invest in anything you haven’t thoroughly and independently researched. Most importantly, if you don’t understand the investment, don’t buy into it.
Be A Smart Investor
Investor.gov has free tools and resources to help you learn how to save and invest wisely. When you’re creating an investment strategy to prepare for your financial future, don’t think of it as a day to day way to get your adrenaline fix. Don’t gamble with your financial future, and think in terms of how to plan for the many days ahead. Research every investment opportunity, understand your risk tolerance, and create an investment plan for the long term.