There's nothing like a 60% return in less than a year -- as we've seen from the Nasdaq -- to make some people think they've got the Midas touch. Yes, the day traders are back. It seems like some people never learn.
According to Tuesday's edition of The Wall Street Journal, brokerage firms such as AmeriTrade
To attract this lucrative business, many of the brokerages are lowering commissions for customers who make between 108 and 250 trades a year, depending on the company.
When we say "lucrative," we emphasize that this is lucrative for the brokers, not the traders. Even during the bull market of the '90s, only 11.5% made a profit, at least according to a study by the North American Securities Administrators Association.
According to managers of day-trading firms cited in a Washington Post Magazine article published during the bull market, about 90% of day traders "are washed up within three months." David Shellenberger of the Massachusetts Securities Division has noted that "Most traders will lose all of their money." A principal of a day-trading firm even admitted that "95% [of day traders] will fail in the first two years."
The Journal article says the volume is still well below the pre-bear market activity, and that traders seem to be holding onto shares a bit longer than they did three years ago. A USA Todayarticle on the comeback of day trading says today's traders are more disciplined, and most still keep their day jobs. (Both articles say that day traders prefer other labels, such as "active trader" or "semi-professional trader," which is like calling someone with a drinking problem a "moderate alcoholic.")
The resurrection of day trading is a disturbing development, especially when coupled with the increasing use of margin. The risk is great for everyone involved, yet the reward goes to very few. The short-term movements of a stock, or the overall market, are impossible to predict.
We leave you with these words from the Securities and Exchange Commission: "Day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status. Given these outcomes, it's clear: Day traders should only risk money they can afford to lose."
To learn more about brokerages and possibly find a better brokerage for yourself -- for investing, not day trading -- check out our Broker Center .