In the last few years, multiple discount brokerages have entered an already crowded market. Historically, the brokerage space was dominated by legacy players who charged a high fee for the purchase and sale of financial instruments.
But the entry of applications such as Robinhood in the U.S. and SelfWealth in Australia have made it easier for the retail investor to access equity markets.
Further, the COVID-19 pandemic that forced people to stay at home resulted in increased stock market activity, especially from retail investors.
Individuals turned to the indexes to make a quick buck and experiment with day trading as entertainment options were few and far between.
An increase in day trading activity
While trading in the stock market is exciting, building-specific skill-sets before you dabble here is advisable. Most people don’t have the time or expertise to pick and trade individual stocks. In addition to real-world experience, a trader needs to be patient and have the temperament to sustain heartbreaking losses and book massive returns in a single trading session.
According to a report from CNBC, TD Ameritrade, one of the largest brokers in North America, confirmed website visits that gave trading instructions increased at an exponential rate since the onset of COVID-19.
There might be several reasons that have caused a spike in day trading in recent months. As unemployment rates surged due to economic lockdowns, the federal government paid billions of dollars in financial benefits to residents. A few of these individuals would have viewed day trading as a lucrative option as it provides a chance to replace lost income.
Another reason is an increase in advertisements that target day traders who are beginners. The promise to generate staggering profits from just a few trades is attractive enough for the layman investor to enter the day trading business.
The risks associated with day trading
While the possibility of generating market-thumping gains will continue to warrant attention, a novice day trader is more likely to suffer huge losses over time. The equity markets generally remain volatile in the short term due to macro-economic challenges and news that impact the day-to-day movement of stocks. It means you need to be on the top of your game to benefit from this underlying volatility and book consistent profits daily.
Very few investors have been able to beat the market at a steady rate. The future is unpredictable, and no one has a crystal ball to help them make the right decision.
A market leader today can easily be a laggard tomorrow. The largest companies a few decades back were capital-intensive ones, such as Exxon Mobil and General Motors. However, today, companies with trillion-dollar market caps are tech giants such as Apple, Microsoft, and Amazon.
Another difficulty associated with day trading is the ability to time the market. You have to predict a stock’s performance and make the right move within a few minutes to capitalize on market movements.
How to become a day trader?
We have seen the risks associated with day trading. However, with high risk comes the possibility of generating high returns. The most important criteria for retail investors entering this space is to learn how to day trade.
Newbie day traders are first advised to start with virtual trading. As we have seen, trading in equities comes with its own set of complications, and you can use a virtual trading platform to try out your strategies. There are multiple virtual trading platforms available that provide users with real-time price movements.
Even the most experienced traders have a bad day or even a bad month. Losing money is part of the game, and you need to have the character to stomach these losses. Day Traders who are starting out should also invest the amount they can afford to lose and should not be haunted by the cash burn in the future. If you are starting to day trade, your losses might be higher until you learn the intricacies of this disruptive and volatile space.
You also need to equip yourselves with the required skill set before you start trading with real money. There are many online courses and study materials you can access which will enhance your trading capabilities. It includes choosing the right broker, understanding chart patterns, and designing a trading strategy that’s in line with your risk appetite.
The final takeaway
While day trading has gained popularity in the last 15 months, we know it carries significant risks for the average retail investor. Whether or not you want to day trade should depend on your skill-set, level of education, and the ability to remain patient across good and bad trading sessions.