Day trading debate - the pros
- Scott Fehrenbacher Crosswalk.com CEO & President
- 1999 25 May
Recent technological developments have made possible a new trend in stock market activity: day trading. As implied by the name, day trading entails short term purchases and sales of market securities for the purposes of making quick incremental gains.
In the day trading world, long term consists of 30 minutes and stocks are purchased not for their fundamentals but for their momentum. A good trading day is determined by the level of market volatility. The idea is that the trading opportunities of market upswings are just as valuable as those created by market downturns, which are excellent conditions for shorting (a method used when you expect a stocks price to drop and you sell shares you dont own but buy them later at a lower price, thereby applying the traditional buy low, sell high strategy in reverse.)
Through the growing access to and convenience of online trading, thousands of former investors (who purchase stocks as investments based upon the companys fundamentals) are giving up their day jobs to become traders. Day traders have the capability of making or losing hundreds of thousands of dollars each day. This unprecedented access to the markets and the opportunity it represents has contributed to the increase in the number of people buying into the stock market.
So the question remains: Is day trading a good thing? With the impact that day trading has across the country, the pros and cons of the practice are definitely open to question. Crosswalk.coms own Mary Naber and Scott Fehrenbacher give their views of the debate and you are encouraged to come to your own opinion.
Today, Scott Fehrenbachers writes of the Pros. (Click here to read Mary Naber's Con article.)
The PROS of Day Trading
Without it, our economy would not be as robust as it is. In fact, other countries around the world regard its efficiency with awe. Without it, company stock values would be far lower as would individual wealth would be less than it is today. The convenience it represents to people in everyday life has been dramatic.
However, it comes with baggage. As a matter of fact, hundreds of thousands of people have been hurt by it over the last year. Thousands of people have lost everything because of it. Hundreds of thousands more may not have lost everything, but still will have scars they must deal with the rest of their lives.
No, I'm not talking about day trading on the Internet.
I'm talking about the number of truck-related traffic accidents on our nation's highways each year. Our economy depends on the efficient delivery of products via our nation's sophisticated highway system. Yet, last year over 444,000 traffic accidents involved large trucks. Last year, 5,355 lost everything as a result of them - including their lives. In fact, one out of every eight accidents in America involves a large truck.
What does this have to do with day trading? A lot.
Americans recognize that the advantages of truck delivery are an integral part to our nation's strength and economic way of life. There is also the recognition that there is an awful human cost to those who abuse the traffic laws in the operation of truck transportation.
The potential human cost is attacked through aggressive education campaigns and a highway system designed for safety. But these costs are not dealt with by saying that despite killing thousands of people each year that all truck transportation is bad and should be banned.
As a matter of fact, when it comes to an irresponsible truck driver, even innocent families can be injured or killed without any fault of their own. When it comes to day trading, the trader cannot hurt anyone besides themselves and their own family.
Individual versus the State
Inherent in the conversation regarding the pitfalls of day trading is personal responsibility. Fairly quickly, the argument boils down to a philosophical approach of whether the government's role is to protect each of us from whatever trouble we might get ourselves into -- a paternal view. I find most of those who pontificate against the ills of day trading to fall into this camp. Just because there are individuals who will abuse the system irresponsibly to their own financial detriment, they say, then we should abolish access to day trading for everyone.
Of course, this argument doesn't hold water. I submit that there are exponentially more people in America financially hurt by irresponsibly using their credit cards than are hurt from irresponsible day trading on the Internet.
The only possible exception is if there is not adequate opportunity for knowledge and education readily available to allow for responsible use. Once again, inherently, the Internet puts more educational resources for personal investing at a person's fingertips than have ever been there before.
An Investor Revolution
Wall Street has historically thrived on their control of information. Need an earnings report or economic forecast? Call your stockbroker. Need to know what industries appear poised to do well in the present climate? Call your stockbroker. Why else would your broker command the premium commissions he or she would charge? For information. Controlling information is the goose that lays Wall Street's golden egg.
The Internet is challenging this long-standing tradition. Access to real-time information is abundant and often free. Internet trading for the first time in modern economic history allows individual investors instant access to institutional quality research, the lowest trading commissions formerly reserved only for the major Wall Street firms, and instant access to news and reports. Much of the anti-day trading discussion has really been thinly disguised complaints from the Wall Street elite who are scared to let mainstream America join their club.
Is day trading the best way to invest?
No. Personally, I would recommend only the most sophisticated, educated, experienced, and well capitalized investors consider day trading. It is surrounded by danger and offers commensurate opportunity. Amateur investors should not even consider it.
However, Internet-based investing represents freedom and opportunity for individuals to invest nearly on a par with Wall Street elites and therefore also represents an economic revolution that can have enormous positive impacts.
Opportunity brings risk. Let the investor beware. And long live Internet-based investing.