It was at the center of a recent multiple homicide. It's receiving close scrutiny from the U.S. Securities and Exchange Commission (SEC). It's made millions for some, lost fortunes for others. Yet day trading continues to entice Americans--and, yes, even entrepreneurs who may be juggling online trading with running their businesses--to take a chance with their personal finances.
"There's a blurred distinction of what a day trader is, depending on whom you talk to," explains the SEC's John Nester. According to the SEC, those individuals who invest online are dubbed "day traders light"--they execute a lot of trades but don't have real-time access to the market information that traditional, offline day traders do. Why the distinction? Because if you can't trade in real time, you don't know the most current prices and changes--and that amplifies the risk of buying and selling. Still, these risks of trading online aren't stopping day traders light from choosing the Internet as their investment medium.
According to SEC Chairman Arthur Levitt, 25 percent of all trades made by individuals are done online. That's 7 million U.S. investors, up from not one Internet trade a mere five years ago.
"A lot of people try to trade on the Internet in hopes of making a quick profit on short holding periods, but they don't always understand the nuances of the decisions they make," says Nester, adding that many--if not most--online day traders have inadequate investment knowledge.
"Successful investing takes time," Nester explains. "To make intelligent decisions, you need to look at company fundamentals, learn about the industry, check to see if revenues meet expectations, and read about management decisions and analysis in the annual reports." In many cases, Nester adds, people wager large sums of money on companies they know nothing about other than their ticker symbols.
According to the Electronic Traders Association (ETA), there's a steep learning curve when you start trading online, and you can expect to lose money during your first three to five months of trading. And as with small businesses, the failure rate among day traders is high: approximately one-third. Consequently, you need to go into day trading armed with information, information and more information, advises Bill Lauderback, vice president of corporate affairs at Momentum Securities Inc., a firm that provides electronic access to securities markets and private trading systems. Before you start, you should ask yourself: Is it worth my time and the risk to my business?