When many people think of investing in the stock market, they think of opening bells, closing bells and the frantic roller-coaster ride in between those bells. They also think of life-altering financial gains and staggering, heart-breaking losses.
These images may be fitting when describing the day trader, or someone who expects to make money every day on the changes in share prices that occur within hours, minutes or even seconds. However, investing in stocks does not have to be this stressful and intense, especially if the goal is to make money over the longer term rather than over the day.
This distinction between the day trader and more longer-term investors is important for novice investors to understand, especially as online trading platforms have increased the number of people who invest in stocks, forex and other assets.
Not just traditional traders, but social traders – those who trade on online networks where they follow and copy the investment moves of others – need to understand what their goals are, and if they are seeking short-term or long-term gains.
While the gains may be higher in day trading, the risks are also higher. In fact, day traders have an 80 percent chance of losing money over a year, according to a recent study.
Another study, from the University of California at Davis, found that just 1.6% of short-term traders were profitable net of fees. That stands in sharp contrast to someone who invests in an index fund based on the S&P 500, where the average yearly gain runs about 7%. Keeping this in mind, making money as a day trader is not so simple, and is far from guaranteed.
“Day trading or trying to time the market is just a very difficult way to make a living,” Frank Davis, director of sales and trading at LEK Securities in New York recently told MarketWatch. “Professionals advise against it, no matter who you are.”
Social trading has often been connected to speculation and day-trading, at least in much of the media coverage around it. Some have said the options for leverage encourage speculation. In reality, however, such platforms do not dictate how one needs to trade, and the platforms can be just as well suited to investors who are interested in the medium term.
In fact, some of the top traders on these platforms say their success is due to taking a medium- to long-term approach, rather than taking big risks quickly make gains. In fact, many platforms themselves have become more aware of the dangers of taking high risks in order to quickly make money: To discourage that, or at least put the risks in perspective, most platforms now assign a risk score to each trader who is available for others to copy. Those with the highest risk scores cannot be copied.
As social trading has grown in recent years, the platforms have become more advanced and users can tailor their setting to meet their investment goals, whether that is the roller-coaster ride of a day trader or a more longer-term approach, based on patience and index funds. There will always be those who want to make their money before the day’s closing bell, but there will also be those who want to give their investments more time.
As more people, especially younger people who are accustomed to running much of life online, become social traders, the platforms are becoming more aware of the different needs and goals of users, and catering to both of these types of investors.