If you’re ever tempted to day-trade, think twice. It’s not investing.
Investors (at least good, Foolish ones) study businesses, carefully select stocks, and usually aim to hold on for the long term — years or decades. They consider themselves part-owners of real businesses. Day traders, meanwhile, spend hours glued to monitors, tracking stocks and placing orders. They’ll typically place scores of orders each day and hold each stock for no more than a few hours. Many ignore company fundamentals, focusing only on what might make the stock move in the very short term. While investors may aim to pay long-term capital gains rates by holding stocks for more than a year, day traders are stuck paying at the generally higher short-term rate.
What’s the payoff? Well, a study by the North American Securities Administrators Association suggested that only about 11.5 percent might trade profitably, and that some 70 percent “will almost certainly lose everything they invest.” (Note that trading “profitably” does not even mean one will beat the S&P 500, available via the purchase of an index fund at very low cost.)
According to managers of day-trading firms cited in a Washington Post Magazine article, about 90 percent of day traders “are washed up within three months.” A principal of a day-trading firm even admitted, “95 percent will fail in the first two years.” Former Securities and Exchange Commission Chairman Arthur Levitt recommended that people only day-trade with “money they can afford to lose.”
The people who have made the biggest killings in day-trading may be those who have run day-trading firms. These outfits provide day traders with trading equipment and charge them commissions per trade. With each customer trading all day long, coffers can fill quickly.
Understand that people who trade stocks online are by no means necessarily day traders. Accessing brokerages online makes sense for most people, especially when commissions for trades can be as low as $5 per trade. (Learn more at www.broker.fool.com.)
Fellow Fool, resist any temptation to buy and sell stocks rapidly in large numbers. Don’t let yourself or those you care about get sucked into day-trading. Learn more about it at www.sec.gov/answers/ daytrading.htm.
Ask the Fool
Q: If I sell a stock for a loss in my IRA account, can I deduct that on my tax return? — C.T., Greensboro, N.C.
A: Sorry. For the most part, you deposit pre-tax money into a traditional IRA. When the time comes to withdraw those funds, you’ll be taxed on the entire withdrawal, regardless of any gains or losses. (Of course, if you make non-deductible contributions to your traditional IRA, they won’t be taxed when you take them in the form of distributions.) With Roth IRAs, you invest post-tax money and eventually withdraw it all tax-free. But you don’t claim losses (or pay taxes on gains) from year to year.
Q: Why do stock prices go up and down so much? — C.A., Rutland, Vt.
A: There are many reasons. Here are some: investors reacting to reports of rising or falling sales and profits, changes in management, new products or services, big contracts landed or lost, famous investors reportedly buying or selling shares, good or bad write-ups in the media, analysts upgrading or downgrading the stocks, the stock market in general rising or falling, other stocks in the same industry rising or falling, heightened fear or greed among investors, good or bad news regarding a competitor, lawsuits filed or won or lost, pending legislation that could affect the company’s future, changes in supply or demand for the company’s products or services, global expansion or retrenchment, the industry is “hot” and people expect big things with or without reason, the company might buy or be bought by another company, or the company will spin off a division.
Disregard short-term moves. Focus instead on developments related to your company’s competitive strength, growth prospects and financial health.
My smartest investment
I’m an 86-year-old World War II paratrooper veteran who saved all my hazardous duty pay and, upon discharge, bought 50 shares each of General Electric and Westinghouse. I got married in 1947. In 1952, I bought a new bedroom suite. To pay for it, I decided to sell the GE stock, since Westinghouse paid higher dividends and was big in nuclear energy. That probably wasn’t the best choice. We still have the nice bedroom suite, though. Based on GE’s multiple stock splits and current price, the suite’s equivalent present-day valuation would be close to $350,000. It would be a nice sum to have now. — Charles R., West Chester, Pa.
The Fool Responds: You’re right. General Electric would have been the better choice. Over the years, Westinghouse bought (and sometimes sold) many businesses, such as CBS, Infinity broadcasting, American Radio Systems and Country Music Television. After changing its name to CBS, it was bought by Viacom, which today owns MTV, Nickelodeon, Paramount Pictures, Showtime and Simon & Schuster, among other properties.