Concerts, bars and parties are coming back. But that doesn’t mean amateur day traders are giving up their pandemic hobby.
A recent survey from digital investment advisor Betterment of 1,500 investors found that 58% of respondents who self-identified as day traders also say they expect to do even more trading as normal activities resume. Nearly half of the day traders polled said they have only been actively day trading for 2 years or less.
While COVID-19 restrictions kept people inside and glued to their screens, trading stocks became America’s favorite pastime. Citadel Securities estimates that individual investors' share of total trading volume doubled, from an average of 10% of overall activity in 2019 to 20% in 2020, according to the Wall Street Journal. The obsession with meme stocks shows that newcomers to the stock market aren’t just investing in funds and watching their money grow over time — they’re regularly trading in and out, trying to score a major win.
And, as the survey suggests, they may not be ready to stop.
Why day trading may stick around
Folks who have been in the stock market for years know that compound interest can make a little investment grow if you simply buy and hold. But 58% of day traders from Betterment’s survey said their main reason for trading this way is that they believed they could make more money in a shorter period of time — in other words, they could outsmart the market.
Why? New investors may believe this is a good way to make money fast because they haven’t actually been investing in the market long enough to see the downsides, says Dan Egan, vice president behavioral finance and investing at Betterment. The market's current returns may be encouraging, with popular meme stocks soaring, but volatility is inevitable. Academics studying the stock market have found that very few day traders actually make money, and a study of day traders in Taiwan Found that 75% of day traders quit within two years.
“There’s a lot of noise,” Egan says. If you make some good trades and some bad trades, assume the good trades are because you’re a good investor and write off the bad trades, it will take you a while to realize that day trading might not actually be working. (Plus, we hear a lot more from the people who make money this way and crickets from the people who are losing money, so it’s easy to be convinced that day trading is lucrative.)
The work from home trend also looks like it will be sticking around with more and more companies saying that employees can work remotely for at least part of the week. That could encourage day traders to keep at it, Egan says. While you likely wouldn’t be comfortable pulling your finances up on the screen at work, either because you don’t want colleagues to see your personal information or because you don’t want to seem like a slacker, you can easily do so in the comfort of your home.
But there also could be something called extrapolation bias in the survey responses, he says. Right now, people think they’ll continue to day trade because that’s the way things are, but it could change as traders realize they want to get back out into the world and pick up their other, long lost hobbies.
The risks of day trading
If you scroll through Twitter or Reddit, you’ll often see day traders bragging about their latest gains from meme stocks and cryptocurrencies. But it’s a risky activity.
A lot of day traders aren’t trading based on fundamentals, like a company's business model and long-term growth trajectory, or on a well-developed strategy — it’s about just following a trend, says Dan Eye, CFA, head of asset allocation and equity research at Fort Pitt Capital Group in Pittsburgh, Pennsylvania.
“There’s more to the picture than just what a group is posting on Reddit,” Eye says. “There are a lot of other things that can move the market or a certain stock”
A company’s quarterly earnings report, for example. Just because a company is getting a lot of hype right now, it might not have the underlying financials to be a good buy over the long term.
What's more, timing when to get out of your position is really hard. When you’re day trading, you’re trying to exploit human behavior, says Leon LaBrecque, chief growth officer and financial advisor at Sequoia Financial Group in Troy, Michigan.
“You’re always trying to find out some way that you can figure out what other people are thinking before they’re thinking it so you can outmaneuver them,” he says. That’s a tough game to play, and it’s similar to playing poker against a whole bunch of other poker players.
There are logistics too, like the fact that often you have to pay taxes on your trades or that if you want a shot at success, successful, day trading will need to be a full-time job and likely can’t be just a hobby.
“You’re going to have to work at it 5 days a week and all day long and do a bunch of research,” LaBrecque says.