WHEN GOOD INVESTING GOES BAD
Notice that I am referring to day “traders” as “traders” and not investors. The distinction lies in the process. Investors seek to make money through a variety of securities and equities over a long period of time, while traders strive to make a quick profit in the least amount of time possible. Although we would all like to see our account values increase more quickly than slowly, history has shown that investment results become more and more positive, and larger, over longer periods of time.
Day traders will find that the more they buy and sell looking for that quick profit, they will wind up not only not making the profits they expect and hope for, but also they will wind up causing them- selves more harm than good. The first ill of day trading is the enor- mous cost of commissions paid to brokerage houses. Traders usually don’t use advisors or regular brokers to execute their trades for them. Rather, they sit in front of a computer and watch the stock market ticker line go by, as well as watching the prices of the individual stocks they own. Day trading really became popular with the advent of online brokerage firms, such as Datek and E*Trade. With these, the traders could put in a relatively small amount of money and then do all the trading themselves. (Brokerage firms generally require a higher minimum opening balance than on-line firms.)
Even though these traders are handling all their own trading, the on-line brokerage firms continue to charge them commissions or execution fees. There is one on-line brokerage that advertises trades for $8 apiece. Many people don’t realize that a buy and a sell are two separate trades, not one. For day traders who are buying and selling many different stocks a day, or even over a period of a few weeks, that cost adds up significantly. For example, John Q. Client opens up an account over the Internet because he wants to “take advantage” of day trading. This on-line firm charges $8 per trade. He initially purchases three different stocks, XYZ Corpora- tion, DEF Conglomerate, and RST, Inc. All of these stocks are trad- ing at relatively low prices, and John thinks that they will go up. He is right; each of the three stocks go up within a few hours. John sells each of the stocks and purchases four more different stocks. He thinks day trading is fabulous because in a matter of hours, he