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 a lot of money quickly and others have sadly fallen victim to the risks of engaging in this type of speculative investment. If you are thinking of day trading, I urge you to think again. day trading is serious business and not something you just dabble in for fun, especially if you are using leveraged investment strategies or trading leveraged products.
Whether you’re just starting out or an experienced investor, day trading is a complicated and risky form of investing. In short, unless you understand the risks you are taking and the economics and performance of leveraged investment strategies, such as trading on margin or using leveraged options or products, you should not engage in day trading.
day trading involves actively buying and selling securities on the same day, trying to capitalize on short-term price changes. Those involved in day trading often borrow or leverage capital each day to purchase additional assets, but it also substantially increases their risk. This sophisticated level of investing requires careful market and news monitoring, moves quickly and involves a great deal of speculation. professional day traders are usually very experienced and have a deep understanding of the markets, products, strategies and risks. Before engaging in any type of day trading, it is crucial to understand the considerable risks involved.
the latest fashion
Some celebrities and high profile people have spoken about how they have made a lot of money day trading. some may use day trading as a way to fill a gap in entertainment or the like, while other activities, such as sports betting, are currently limited. The fact that some celebrities participate in this type of investment does not mean that it is the right investment strategy for all investors. every investment involves some degree of risk; however, engaging in risky trading strategies, particularly those that involve 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 investment fad, I strongly recommend that you take a more balanced, long-term approach to investing.
you can lose everything and more…
Day trading is not for the faint of heart as it involves minute-by-minute decision making as well as leveraged investment strategies that can lead to substantial losses. The objective of this type of investment is to benefit from the daily changes in the short-term market and in the share price. the risks involved, however, are substantially higher than longer-term investment strategies. Many things can happen during the trading day that can result in market and stock volatility that can be challenging for even the most experienced day trader.
It can be especially difficult to control your emotions at the door when making investment decisions in this type of environment, which can lead to some costly financial mistakes.
Day trading often involves sophisticated products, and day traders often use leveraged investment strategies. Leveraged investing involves the use of borrowed capital to buy stocks or other securities. Some examples of leveraged investing include sophisticated products such as options trading and margin trading. Leveraged investing can increase a day trader’s profits if the price of a stock 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 at first.
If the price of a stock or the market moves in the wrong direction, it can cause very rapid and substantial financial losses. leveraged investing can even result in the loss of more money, and in some cases substantially more, than was initially invested. Leveraged investing in a fast-paced and complicated environment can be very challenging and should not be undertaken by inexperienced investors.
Unless you fully understand the magnitude of the risks involved and can live with those risks, you should not consider these types of investments.
It is important to understand your risk tolerance level when making any type of investment decision. When developing your investment plan and considering risk, think about your investment objectives and experience, time horizon, current financial situation, and loss aversion. If you don’t like to take risks and want to get a good night’s sleep, day trading is probably not for you. everyone has different risk tolerances and only you can decide what is 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.
it is best to invest for the long term
Investing for the long term is the best way to ensure a solid financial future. When you’re creating your investment plan, it’s important to identify your financial goals, such as saving for a home, your children’s education, and retirement. Next, 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 stocks, bonds, and cash can be a sound strategy. Diversifying and including various types of investment products in different types of industry sectors in your portfolio reduces the risk and impact of volatility on your overall portfolio.
understand what you are investing in
Day trading can move very quickly and you may not have time to research each investment thoroughly. take your time and never invest in anything you haven’t thoroughly and independently researched. Most importantly, if you don’t understand investing, don’t buy 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 daily 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 each investment opportunity, understand your risk tolerance, and create a long-term investment plan.