Day traders engage in the practice of riding the stock market's ups and downs, trying to squeeze profits by rapidly buying and selling shares. There are many firms around the country set up to service individuals desiring to get in on the activity; we've all seen the ads on TV.
A recent SEC examination of 67 day trading firms had some fascinating findings. The study found that a trader marking a fairly average 50 trades a day, and paying the modest commission structure of a flat $16.70 per trade, spends $16,700 a month in trading expenses (50x$16.70x20). Add to that $150 a month in data feeds, and he would have to generate a staggering $202,000 a year in profits to cover expenses.
This does not include the impact of taxes (almost all gains are short-term in nature) or the cost of margin borrowing, which many traders engage in. Imagine if a trader is starting with a million dollars of assets. They would need to capture in excess of 20% a year simply to break even (assuming no taxes and no loans to cover margin requirements). Considering that very few managers outperform the market, and that the long term return for stocks is anywhere from 11 to 15%, depending on the time period, the day trader needs to be incredibly good to survive.
The end result? A senate sub-committee found that 80% of day traders lost money. Another study by Washington State found that 77% of day traders lose money. We're not sure about the IRR for the remaining 20% but we are sure that most of the day traders would be better of working with a professional to manage their serious money, and spending their time on more lucrative ventures.
So the next time somebody tells you about their friend making a killing day trading, let them know that only two out of ten ever make money. And that over the long-term could very possibly make the number go down.
Patience, expertise and paying a fixed fee might not be so bad after all……..
Source: Reuters & CBS MarketWatch
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Don't Quit Your Day Job
Day trading firms are coming under increasing scrutiny.
A recent SEC examination has interesting findings.
Day traders need to be well funded and incredibly good to survive.