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Day Trading Can Lead to Some Real Nightmares

Who wants to be a millionaire…what a silly question. Who doesn’t want to be a millionaire is more like it. And the final answer is that no one wants to be left out of the money-making ventures that are popping up faster than you can say dot-com. Long-term saving and investing with mutual funds and well-researched companies seems to be the name of the game these days.  But for those who think they can click, buy and sell with the best of them, online day trading has become the wave of the future that sometimes rides on a misleading current.

In the height of the afternoon or after dark, you can log onto any one of dozens of trading firms to find out what’s hot to buy and then turn around and sell it that same hour or five minutes from then. It’s technically called day trading, and it has sent some straight to the bank, but what most traders are doing when they haven’t researched the company they’re dumping savings, loans and other important monies into could be considered gambling, not investing. At least that’s what the SEC has warned against.

High Speed Stress-Out

SEC spokesperson, John Nester says day trading is a strategy based on “rapid-fired decision making and trading with little regard to understanding the company that’s the subject of the trade.” Clearly not a smart way to double your money — especially if you’re a beginner.

Most successful day traders have a lot of capital and good judgment that comes from years of dealing with the market and specialized training. Many of them love the rush and the occasional large returns, but even more suffer from the high-stress of trying to outsmart the market. In fact, one company reported 67/68 of its employees losing money on day trades.

John says that studies have proven that the more you trade, the less money you make. “Employing a short-term strategy where short-term strategies work the least, won’t put you ahead of the game.” John says. Sound backwards? Well, do the math and it might add up to perfect sense.

Meet Mr. Broker

In the stone ages, way before the Internet was popular, people used stockbrokers to help them with investment decisions. The one-on-one relationship allowed investors to carefully select the companies they wanted to buy stock in. “It was a relationship with a broker who understands your financial goals and is obligated to only recommend stocks that comply with those needs,” John explains.

When you’re trading online, there are still brokers on the other end of your request. But they don’t know what your goals are. They don’t know how much money you’re working with. They’re not required to give you any advice. They just fill your order. If you say buy, sell or cancel that’s what they will do: you have to develop your own strategies.  If you haven’t done the extensive research (and we mean lots) it takes to understand the company, or companies, you’re putting money into, the SEC recommends slowing down to consider investing in something more secure than a 30-minute hot-streak.  “The problem with short-term trading,” John adds “is that if you try to make money on a purchase and the resale of it, you have to be right twice; and that’s a very difficult position to be in.”  And thousands have lost entire savings to what they though was a sure thing.

Invest in Taking Time

So little experience plus little market knowledge plus reckless day trading equals lost money. The college education or car you’ve been saving for will last longer than the rush of risking your money. But aside from poor investing decisions, the SEC and the investment community is concerned about Americans’ investing practices.

Online day trading isn’t all bad—it has its redeeming qualities. John points out that online trading has lowered costs for investors, it’s cheaper to trade today than 5 years ago, and it’s more convenient--all you have to do is log on. But when you’re working online, security will always be an issue. Accidentally ordering something twice has become a problem, sometimes canceled orders aren’t received or processed, and the SEC gets hundreds of complaints about Internet fraud. All of these can put you in way over your head, which usually leads to financial loss and mental stress.

Online or not, investing for the short and long term is always a risky business, so SEC chairman Arthur Levitt suggests you arm yourself with at least 3 golden rules: Know what you’re buying, know the rules you are bound to once you buy a stock or a bond, and know the level of risk you are undertaking.

And as John reminds, “If someone hands you a scalpel, that wouldn’t make you a surgeon. Just as the ability to trade online couldn’t make you an investor. Investing should be for the long-run, not minutes or hours.”