It's not easy being a day trader these days. Aside from choppy markets, day traders are getting some bad press. A report released yesterday confirmed what any fool could surmise -- day trading is gambling.
So who gets the blame? The day trading firms or the investors that fail to follow the "if it sounds too good to be true it is" axiom and bet on fractional movements of Net stocks.
| Is day trading being vilified? |
Despite the sometimes-shady aura surrounding day trading firms, it's a little difficult to feel sorry for their clients who bet the ranch and lose. It's like the folks that lose their shirts in Las Vegas -- are the casinos to blame?
Blame it on greed. Everything is just fine when the market soars and a chimp can make money. In that environment, day trading books become best sellers. Introduce some volatility and people can lose big. That's the game and you should know the risks going in.
If you don't know the risks -- commissions add up and you can lose everything -- who should get the blame? Hint: Look in the mirror.
The damning report, which was released by the North American Securities Administrators Association, Inc. (NASAA), a body of state regulators, cited misleading marketing, lax supervision and highly questionable loan schemes as 70 percent of day traders lost all the money they invested.
Note that the report, the result of a seven-month probe, focuses on day trading firms NOT online trading. The two are often confused. Online trading is the typical Schwab and E*Trade accounts. Day traders typically trade at firms such as All-Tech Investment Group and use proprietary software to make rapid-fire trades. Day traders have more immediate access to the market than those with online accounts and often pay higher commissions. There are no hard figures on how many day traders exist, but regulators reckon the number to be 4,000 to 5,000.
The report has a knee-jerk feel to it when it comes to timing. The report appeared just days after Mark O. Barton, a troubled man who happened to be a day trader, went on a shooting rampage in Atlanta. Some press accounts partly attributed the rampage to trading losses, but Barton's history was shaky well before he started trading.
The NASAA report notes "70% of public traders will not only lose, but will almost certainly lose everything they invest." The NASAA concludes that state regulators need to step up inspections of day trading firms and bring more enforcement actions where appropriate.
The report highlights some issues with day trading firms such as suitability of their clients and the fact that day traders need to make a 56 percent profit to cover commissions. But there are also issues with the regulator report, which focused on one All-Tech branch and analyzed 26 random day-trading accounts. That sample sounds a bit skimpy considering there are 62 firms and 287 branches in the U.S.
The report quotes All-Tech's marketing as misleading because it promises riches. That allegation is questionable. In its FAQ, All-Tech says "people with at least an average intelligence, and the traits of discipline, intensity and desire, have the potential to become a successful trader."
But that same All-Tech FAQ outlines many of the risks.
"This money should be considered risk capital; it should not be money you need for ordinary expenses, or to finance your child's education or your retirement. You should have the financial ability to withstand the potential loss of this capital," says All-Tech.
The day trading backlash was inevitable. For starters, too many people who don't know what they're doing see it as a quick way to make a buck. It's been well documented that you only need to know three words when it comes to investing -- buy and hold. A few months ago an acquaintance was pondering taking out a second mortgage to day trade. He was talked out of it, but would have been a prime candidate to lose his assets.
Know your personality and know whether you think too much. The day traders that lose often confuse their trade with investing. Day trading is more like playing video games or gambling. Know the difference.