The number of unemployed U.S. citizens rose to a high of 20.5 million during H1 of 2020, according to Pew Research Center. With that in mind, it makes sense that an increasing number of people are testing the waters of day trading—despite its unfavorable track record of success. So what are the risks of day trading, especially in today's volatile market?
Is day trading worth it?
Day trading has been a point of contention for years. Back in 2010, Brad Barber of UC Davis finished up a 14-year day trading study, ultimately concluding that a mere one percent of people within the study profited from their efforts.
Day trading has seen fluctuations of popularity, oftentimes correlating with advancements in investing technology. Now that easy-to-use day trading tools like Robinhood are all the rage (in June, Robinhood outperformed every single publicly traded brokerage firm), this investing tactic is returning with brute force.
While all investing carries some sort of risk, day trading takes it to a different level. It's a recipe with two critical ingredients: time and liquidity. You have to watch the market constantly, jumping on bulls before they drop in a hypothetical heartbeat. When you experience losses from day trading—a historically likely scenario—you need the cash to back yourself up. Many investors don't have both, and if they do, it's not for long.
Is day trading gambling?
Day trading rests on the assumption that the stock market is predictable. Unfortunately, it's just not. This makes it akin to gambling, in that you can see tragic losses just as much as soaring high returns. When you're day trading on individual stocks, you're also failing to achieve the benefits of diversification (or investing in a range of companies and industries, a protective net for when the economy is struggling).
You can day trade on cash accounts, but many day traders work on what's called a margin account, aka borrowed money. If (or when) you lose from a trade on a margin account, you're in debt.
To add fuel to the fire, the 2020 stock market has been wildly volatile since the crash that started on February 20. This has a lot to do with ongoing crises like the COVID-19 pandemic.
How the rise of day trading correlates with unemployment in 2020
Tens of millions of Americans submitted jobless claims since the start of the coronavirus pandemic (by the end of H1 of 2020, the number of claims had reached 44.2 million, according to the U.S. Department of Labor). Combine that with canceled events and stay-at-home orders and you've got yourself a breeding ground for desperation.
For many, day trading was the solution to both an increase in free time and a need to replace lost wages. For folks in an unstable financial situation, this is a risky endeavor—far riskier than diversified, long-term investing.
Alternatives to day trading for growing wealth
You don't have to wait until retirement to reap the rewards of investing, but you also don't have to rely on the time-consuming, risky world of day trading. Here are some other options you can try:
- Swing trading: Weeks- or months-long trading that still counts on fluctuations, but is less risky than day trading
- Dividend investing: Investing in companies that pay out dividends, typically on a quarterly basis
- Money markets: A solid option if you want to gain capital on money you need in a few years or less