Gambling Facts and Fictions
Day Trading Money Away
Gambling Facts and Fictions: The Anti-Gambling Handbook to get yourself to stop gambling, quit gambling or never start gambling
Copyright © 2004
by Stephen Katz
Library of Congress: 2004094023
Day Trading Money Away
The stock market is sometimes called "the biggest casino in the world." The stock market is not the same as a casino unless you turn it into one. The trading of stocks whereby someone buys and sells stocks frequently, sometimes buying and selling the same stocks once or more during a day, is known as "day trading." Stock market day trading will turn the stock market into a casino for everyone who does it. Read the chapters in this book on casinos, then you will know exactly what the ramifications are from gambling in a casino. Your turning the stock market into a casino means losing money. Sooner or later all quick in and out, buy fast and sell fast, stock market day traders will lose money, usually a lot of money and eventually all of their money. Money is not made in the stock market by day trading.
The majority of wealthy winners in the stock market are corporate officers and employees who receive free or reduced cost stock shares as part of their salary packages. Corporate presidents and other officers can get wealthy by exercising stock options when they have done a good job for the company. A good job for the company is done by making the sales and profits grow thereby the stock price goes up. Employees can also accumulate wealth with smart long-term buying of offered stock benefits if they happen to stay working for a growing, prosperous company. Non-employee stockholders purchase the stock of companies that are traded on the open markets. These open markets where stocks are traded include the New York Stock Exchange, American Stock Exchange, NASDAQ and others. The stock is usually bought through stock brokerage firms. These non-employees can smartly buy the stock of growing, prosperous companies for the long-term and then watch the value of the stock grow over the years. So these non-employee stockholders can also accumulate wealth. All of these various ways is how good money is made in the stock market.
The house edge in stock market day trading is not only from the stock brokerage firm that charges for the trades, but also in the stock market trading system. Brokerage fees, even perceived small fees such as $10 per trade, will erode away your capital. If you do enough day trades throughout the year, that seemingly small fee per trade really does add up to a large amount of money. Multiply that by a few years of day trading, then depending on the frequency of the trading, that amount can eventually add up to more than your entire capital. So even if you break even trading wise, you can still get wiped out by the stock brokerage fees. This is a guarantee with day trading. These brokerage fees are not even the worst element of day trading.
The worst element of stock market day trading is the stock market trading system itself. The stock market is almost supply and demand but carefully notice that word "almost." A small day trader, buying and selling stocks valued at approximately $100,000 and less, does not always get the best buying and selling price. Sometimes and many times you will buy a particular stock for example at $10.65 when it was really only worth $10.50 at the time. Sometimes and many times you will sell a particular stock for example at $10.50 when it was really actually worth $10.65 at the time. This $.15 difference in each buy transaction and $.15 difference in each sell transaction amounts to $30 total for each buy and sell transaction for every 100 shares of stock. So if you trade 1,000 shares of a $10.65 stock, this means that you are immediately in the hole for $300 on a buy and sell stock trade. The friendly stockbroker from the stock brokerage firm trying to get you interested in day trading, probably never quite explained this fact of immediately losing money. This difference is only for an example and not an average, but some difference is usually there either lesser or greater. This difference will be the eventual financial ruin of a day trader. This price transaction differential is known as the bid/ask. An honest stockbroker can further explain this price transaction differential if you need more information.
Many books have been written about the stock market. Some of them are very interesting and highly informative. The books that pitch "get rich quick" systems through day trading, options trading, commodities trading, etc., are to be avoided. The goal of these chapters on the stock market is not to teach you the inner workings of the stock market but to teach you how to properly use the stock market. In a nutshell, this bid/ask price transaction differential plus the stock brokerage trading fees will always eventually grind out the capital of a stock market day trader.
If the stock market continuously went straight up or straight down then maybe you could make money day trading. Yes, you can actually gamble on a stock to go down, which is called "short selling." But you cannot possibly know ahead of time if a straight up or straight down situation will occur. If you do make money from the stock market going straight up or straight down, then you cannot possibly know when that trend will end. The stock market has always eventually risen in the long-run. But throughout history, the stock market always zigzags up or down, even as it is rising. These zigzags will annihilate a day trader. Especially a day trader who heavily uses margin.
Many folks believed that they were day trading geniuses during parts of the 1990s when the stock market for periods of time was going straight up. When the inevitable corrections occurred and these "geniuses" were heavily margined, they lost all of the profits from those times of a straight up stock market. Many long-term investors though still made money and some made a lot of money. The stock brokerage firms, especially those specializing in day trading, made lots of money compliments of the fees and commissions collected from their day trader customers.
As previously noted, the stock market is almost but not entirely supply and demand. People on the floor of the stock exchanges called "specialists" dictate the intimate fractional prices of stocks. General rules are in place to dictate an orderly market on the transactions to give buyers and sellers of stock a fair shake. But a fair shake does not always happen. Sometimes there can be a 1% or 2% difference in a stock price than what that price really should be. Stocks can swing up and down seemingly disproportionate to the trading volume. If you are not on the inside of these deals then you are a sucker on the outside if day trading. Long-term investors do not care about 1% or 2% differentials in price because they are buying or selling usually only once or twice a year at the most. Those 1% or 2% differentials to a day trader turns the stock market into almost the exact same thing as a casino game with a 1% or 2% house edge. If thinking that you can overcome this house edge by analyzing charts, graphs and annual reports then you are sadly mistaken.
During the late 1970s there was a casino hotel boom in Atlantic City, New Jersey. Casino gambling had recently been legalized in Atlantic City. All of the casino stocks were skyrocketing almost straight up. There was witnessed a trade in Resorts International stock that jumped from $205 to $215 on a 100 shares trade. Specialists are not supposed to allow a 10 point jump on a 100 shares trade but it happened. The stock price actually fell right back down again to $205 on the next trade. It did not go above $205 the rest of the day. Some buyer with a market order for 100 shares paid $10 per share more than that stock was worth. The buying price was almost 5% higher than it should have been. Specialists are supposed to help maintain an orderly trading situation in the marketplace. Their selling a stock for $10 more or almost 5% higher than its last trade on a 100 share trade, sure seems like manipulation. The point is that day traders who are on the outside of the marketplace without any connections to anybody on Wall Street will eventually get stung by something of some kind, something unforeseen, maybe manipulation of some type, but it will be something. You will get stung by the unexpected events and by expected events such as the stock brokerage trading fees and the bid/ask price transaction differentials. Day trading is certain eventual financial death just like a casino. Buying stocks for the long-term is a sound investment and the only way for you to make good money in the stock market.
Again, the stock market is sometimes called "the biggest casino in the world" but that is not a perfect analogy. There is an excellent chance for you to win money by investing in stocks for the long-term. However, there is an excellent chance for you to lose money by day trading stocks. At some point, depending on the frequency of trading and the percentage of capital traded each time, the chances of losing money eventually becomes a certainty. You will lose all of your capital. You also could go into debt by using margin. These are absolute facts even in a rising stock market. There will always be the point whereby if trading too frequently, the brokerage fees and the bid/ask differentials will financially destroy you.
Your favorite "friendly" stockbroker may deny or try to put a negative spin on the Factual Laws of Gambling. A stockbroker or stock brokerage firm interested in churning your account for commissions and fees simply will not give you realistic advice on the certainty that day traders, depending on the trading frequency, will sooner or later lose all of their money and possibly go deep into debt. Certain types of stockbrokers and stock brokerage firms would not survive if people did not day trade with them. So do not look to them for sound financial advice of any kind. Simply avoid stock market day trading in its entirety. Commodities trading is even more of a casino-like gamble than the stock market as far as you are concerned. Avoid commodities trading for the short-term and for the long-term altogether.
Again, stock market day trading will turn the stock market into a casino as far as you are concerned. Many stock market day traders would never even consider other types of gambling. You day traders feel as though you are a classy cut above other types of gamblers. You believe that you are a smart, respectable investor attempting to brilliantly discover pockets of stock value out there during the day. You believe that you will strategically maneuver buy and sell orders in a most expeditious manner to magnificently achieve the maximum profit. You have been cleverly duped into this mode of thinking by stock brokerage firms and their stockbrokers, literature and advertising. A day trader is on the exact same level, as far as losing money is concerned, with any casino gambler or any other type of gambler. You can believe that or not, but it is absolutely true. The only way that you will truly differentiate yourself from any other addicted gambler is to properly use the stock market for your benefit, not for the benefit of the stock brokerage industry.