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Day Trading Hobby
Tetsugen
Registered User regular
Registered User regular
I had a significant tax return this year and would like to take up day trading as a hobby (or even just to take a look into it). I have done a bit of searching in this forum and just to clarify- I am not taking this 100% serious, this is money I can lose, I just want to try it. That being said, can someone offer general advice and reading material ? Thanks!
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I'm not trying to discourage you, as I know very little about this stuff, but I think they're better ways to blow this money. I mean, it's a little hard for me to say anything to anyone, as I play online poker haha.
You would have more fun and likely be more successful by selling things on ebay as a hobby. I know lot of people who enjoy going to local weekly auctions of various kinds, and even sometimes estate sales or simple garage sales and then trying to sell the stuff on ebay for a profit. This is my suggestion.
edit: The most fun in my mind is if you can stumble upon storage unit places that are auction off the contents of units whose owner hasn't paid their rent and/or claimed their belongings for so many months and when you bid a lot the times they open the overhead door but you can't go rummaging through the inside just stand outside and hope what is in those musty old boxes is worth the price.
However, day trading is technically a job, because you need to have a large sum of money from a variety of investors and then move it around at different times to different funds. As an individual, you would actually want to set up a portfolio, purchase the stocks and bonds... and then wait. And then after a year, you would evaluate your position and consider a move.
So your day trading hobby would be a thing you keep an eye on occasionally and then act on one day per year. Not very exciting. You also would do no better than simply handing it over to a fund manager, most likely.
If you actually want to try to play the stock market as if it were vegas, doing multiple trades per day, fees will eat you. Do you understand return on investment and how to calculate rates of return? Do you know what to include in those calculations to ensure that you're not overlooking a cost?
If not, you'd have more fun going to vegas.
BAD HOBBIES:
I'd even contend that day trading as a 'pro' is an excercise in futility and you'd be better off just going to vegas. It seems to fall apart under any sort of rigorous analysis and no one ever talks about the traders who lost all their money gambling, just the winners.
Just go play blackjack and if you really want to try and discern the tea leaves in market volitility, do so in a virtual manner. At least at a card table you will generally get drinks and obsequious cocktail waitresses.
Advice: you don't want to be in a situation where you have to pay a margin call. Avoid being leveraged such that your actions are forced.
I'm assuming this is risk capital (your retirement and savings investments and commitments have been made and this is money you can just blow) right? You may want to look into call options.
Industry regulations require pattern day traders (Entering and exiting a position in a single business day 4 times over the course of 5 business days) to have $25,000 in available equity in their account. So unless your tax return was pretty massive, you wont be able to actually "day" trade. The best you can hope to do is overnight trade which is extremely risky and inadvisable, especially right now.
If you don't meet the equity requirement, most major brokerage houses will lock you from either 1) buying equities all together or 2) buying and selling a position in the same business day.
Good luck.
edit - clarify
There's a bit in A Random Walk Down Wall Street that talks about the day trading "craze" in the early 2000's. From what I remember, the author basically says that the vast majority of those who got into it were wiped out within 6 months, regardless of the bubble. You'd really be doing yourself (and your money) a disservice by attempting to get into this, even as a "hobby."
If you just want to play around a bit, use one of the many virtual stock exchange offerings out there.
That having been said I've been doing it as a sort of a hobby for the past few years. The first year I lost money. The second year I made about the same as I would have if I just left my money in a savings account. Last year I actually made about 8% over the course of the year. I actually subscribe to a service that provides me with a lot of the basic research for stocks and provides a recommended stock of the week so it saves me a lot time.
Fees are lower (a trade costs like 40 cents), Minimum investment is lower (I started my account at $25), and you can bet on everything from stock markets to politics to movie openings to chess.
This money should go into an RRSP and sit there till you retire unless you've already maxed out your potential tax benefits from contributing to RRSP's.
Wow, this is an even faster way to lose money.
Look at those spreads. Please don't waste your time with this service.
You mean the difference between bid/ask price? That's a consequence of low trade volumes. For very popular events like the '08 presidential election it is much tighter.
Plus, all the contracts have an "expiration" date, where every share either becomes worth $10 or $0, depending on whether the "event" happens. In other words, if I buy a share of "Obama Wins" at $6, and he wins, my $6 just became $10, minus trading fee.
I'm not defending it as an investment strategy, only a fun game.
I just googled fantasy stock trader and there's tons of stuff like that online. If day trading is what you want to do for kicks, well you can do it without losing your shirt or getting your money eaten up by fees.
That way you get your feet wet make believe day trading and can invest your tax in things like frozen yogurt and single malt beverages.
You can even pick up a copy of Pit to play with your friends at the above mentioned BBQ (which features frozen yogurt and fine single malt beverages nonetheless). I swear that game is one of the rare ones where the mechanics of the game actually matches the theme. Get the one with the bell.
Additionally, in order to day trade, you are pretty much going to need a margin account. When you place an order to buy or sell, the order will execute when it hits your requested price (use limit or stop orders, not market orders), but not "settle" for a period of 48-72 hours. So you might buy a stock in the morning then sell it at nice profit at midday.... but you will be restricted from purchasing anything with the funds (the initial investment and the profit) for 2-3 days while the trade is settled. If you have a margin account, after you make the sale, you can place a new order immediately, and the funds will be borrowed from the trading company until your prior sale has settled. (And of course, borrowing on margin incurs additional fees. Worth it if you know what you're doing, otherwise it's just one more way to get deeper into the hole).
That's why I week trade. Buy today... set a sell order with a limit price at a reasonable markup, and just wait for the variance of the market to match my price. It usually takes a few days, and there is definately risk involved.
Just gotta know when to hold'em
Backlog Wars - Sonic Generations | Steam!
Viewing the forums through rose colored glasses... or Suriko's Ye Old Style and The PostCount/TimeStamp Restoral Device
Seriously.
I worked for a major (thousands of employees) hedge fund in equity analytics. Any pattern you might think that you've picked up on has been tracked for a long, long time unless you have a *lot* of innovative mathematical models at your hands.
I say "a lot" because most serious firms have direct stock feeds and can execute microsecond-level latency trades, so even if you think that you've picked up on a pattern, you'll get beaten out. You might even make money for a week/month/year, but it's just like Vegas. You might make money there, but on average you'll lose your shirt.
Unless you have some SERIOUS industry knowledge beyond the level of a hired analyst for that field, stay out of individual stocks. Take your tax return and buy something fun with it if you want to play around, or put it in an index fund if you want to invest in equity.
I know it sucks to hear, but I promise that it's true. If you want to learn more about investment, check out The Intelligent Investor (http://www.amazon.com/Intelligent-Investor-Book-Practical-Counsel/dp/0060155477). It's not a "how to beat the stock market" book, it's a "why no one will individually beat the stock market" book. It'll be depressing and it'll make you hate liquid markets, but it'll also potentially save you thousands of dollars and teach you how to actually make smart investments that will pay off in 30 years. And that's the timescale you should always look at for investments. Sucks, right?
If anyone ever tells you that there's a way to get rich quickly, ignore them. There are way too many people in finance with way too much education in market economics, math, and machine learning to have overlooked anything simple enough to explain in a book or website. Whenever there's a lot of money involved, shit gets complicated (or, to an economist, markets get efficient).
"A Random Walk Down Wallstreet" is a good recommendation from the poster above. The Random Walk hypothesis is interesting, and the idea of efficient markets is very applicable to an individual investor although I have some more academic problems with it on a larger scale. Still, it'll give you a much better understanding of how liquidity, efficiency, and the potential for a lot of money all come together to screw you over unless you hedge micro trends and invest for the long term.
OH GOD DON'T GO ON MARGIN.
A) don't day trade.
C) don't ever take out a loan to finance an equity purchase because risk is ALWAYS priced into these kind of transactions and exchange-traded stocks are too liquid to arbitrage.
Just a note, while I don't actually recommend day trading(and was just noting that to day trade you have to have one), there is nothing wrong with buying on margin if you are using it for the purpose of making a purchase while waiting for a trade to settle. The terrible, terrible effects of margin come into play when you leverage.
If you have already made a sale, and will have the money, then buying on margin up to the limit of the actual money you will have after settling just means you can be more fluid in your transactions at a cost (of the margin fees and interest).
If you use the margin account for leverage, to purchase more shares than you would otherwise be able to afford with your own money... then you are going get fucked, and royally.
Backlog Wars - Sonic Generations | Steam!
Viewing the forums through rose colored glasses... or Suriko's Ye Old Style and The PostCount/TimeStamp Restoral Device
I was more worried about:
Having a credit line at all is scary, especially if you start losing a lot of cash and you panic to cover your losses. You cannot borrow + invest and get a constant return, or the bank wouldn't lend to you at all (they'd just make the same investments! unless you have some crazy special domain knowledge that the bank couldn't find anywhere).