March 4, 1999
that anyone can trade stocks on the Internet, a hefty batch of "day
traders" are becoming a force to be reckoned with for seasoned traders.
Ray Johns of Daytraders.com and Marc Beauchamp, of North American Securities
Administrators Association, Inc., answer your questions.
Grube of Aptos, CA asks:
What percent of trading activity is made up of daytraders? What market areas are they trading? How many have actually given up their day jobs (not just retired)?
Johns of Daytraders.com responds:
While it's difficult to quantify the exact number of shares traded each day by day traders, there has certainly been a dramatic increase in the number of individuals 'trading' the markets in recent years. With the advent and growing popularity of the Internet over the last several years, now [more than ever] people have access to the tools required to effect rapid trades in the market at a much lower cost than ever before. When this easy access to tools is combined with the impressive run up in stocks and the market that we've seen just since 1995, it's no wonder that more and more people each day want to try their hand at day trading stocks.
Unfortunately, in recent years, I think there has also been a subtle shift in the type of person, or the "background" of those, that are now undertaking day trading the stock market. Historically, I feel, day trading has been undertaken largely by those investors and market players that have largely already "made their mark" financially. Until recent years, it seems to me that day trading has not been used so much as a means to try to create wealth (as we are starting to see more of now), but used by those that already have it as a means to supplement their current net worth. In fact, my personal view is that day trading is best utilized as just one additional aspect when combined with other more traditional means of investing and asset allocations. The reason I mention this is due to the large increase recently of individuals using 'only day trading' as a means to try to build up wealth. Certainly, when this is the case, it can afford a much higher than normal level of risk to your overall portfolio. As the old saying goes, "you should never risk money you can't afford to lose" - this is especially true when learning [or undertaking] day trading.
As far as what market areas are traded by day traders, again that is very difficult to say; since each trader may have a different style and thus seek out a different group of stocks to trade. In my personal view, ideally day trading should take place on higher quality stocks that can also be viewed as solid longer term holdings as well. I feel that the fundamentals of a company are just as important in day trading as they are in investing. One of the key reasons for this is because trading stocks that are in an overall [longer term] up trend and that are backed up by sound earnings, can often provide some level of protection should you find yourself holding a trade that has gone South instead of North. In other words, if you find yourself having to hold on to a position longer term that was originally intended to be only a short term trade, you ideally want it to be a quality stock worth holding in the first place.
However, with that said, I think many traders in today's market do not pay enough attention to the fundamentals behind the companies they often do trade. In fact, it seems that many day traders largely do not care what stocks they trade, so long as they view the current level or direction of the shares in the market [and this includes the volatility of the movement in the stock] as being suitable for day trading. Unfortunately, I think this is a flawed approach too often used by new day traders in the market these days. And as you will see should you read the report that I write each morning for Day Traders On-line (visit http://www.daytraders.com for a sample), we typically stick to larger cap stocks for our 'short term day trading' just for the additional [free] protection they provide.
As to the question of how many people may have given up their jobs to become day trades, again, it's a larger number than has been seen in years past. I think a more important question is not how many have given up their jobs to become day traders, but how many will ultimately be able to continue to support themselves as day traders over the coming years. Should the stock undergo an extended bear market cycle in the near future, we may find the rush to day trading slowing down and/or reversing. Again, this is another reason we suggest day trading more as a means to increase current net worth, rather than as a mean solely to try to create it.
Beauchamp, of North American Securities Administrators Association,
Press reports indicate that "day trading" accounts for perhaps 10 percent of the volume of the Nasdaq Stock Market. Many day traders are drawn to the volatile Internet and high-tech stocks, which can make dramatic price moves. Again these stocks are very, very risky. The vast majority of investors are probably better off with their money in a growth-oriented mutual fund. Newspaper and TV reporters have profiled day traders who have given up their jobs to day trade and almost invariably these individuals claim they are making money. Rarely, however, do the reporters make the effort to track down individuals who have tried day trading and lost most or all of their money and gone home sadder, poorer but wiser.