When you search for the term ?stocks? or ?Forex? on the Internet, you will inevitably come across advertisement banners promoting trading. They iterate how easy it is to make money on stocks or Forex by simply buying low and selling high within a very short time frame.
They also often give examples of how a random ?housewife? or ?retiree? managed to make six figures or more a month, by day trading. However, what they do not tell you is that most people who attempt day trading end up losing, rather than earning. This is the inevitable fact of a ?negative…
When you search for the term “stocks” or “Forex” on the Internet, you will inevitably come across advertisement banners promoting trading. They iterate how easy it is to make money on stocks or Forex by simply buying low and selling high within a very short time frame.
They also often give examples of how a random “housewife” or “retiree” managed to make six figures or more a month, by day trading. However, what they do not tell you is that most people who attempt day trading end up losing, rather than earning. This is the inevitable fact of a “negative sum game”. There have to be more losers than winners in these circumstances.
With this in mind, I would like to point to three facts of day trading that they do not tell you in the broker’s adverts.
Commission fees can add up
Transaction commission charges are usually minute compared to the actual size of the transaction. This can be as little as 0.1% per trade. If you are a buy and hold investor like myself, these fees are tiny compared to the size of your portfolio. They have a negligible impact on your overall returns and allow you to realise almost all your gains, without having to worry about hurdles to overcome.
Day traders, however, make multiple trades per day and try to make just a few percentage points per trade. As such, they are paying much more in commissions than the average long-term investor. This consequently eats into their earnings and makes it all the more difficult to earn a return on their investment.
You potentially have to pay tax on trading income
Singapore is a great place to be if you are a long-term investor. Long-term investors do not need to pay tax on capital appreciation gains or dividend income. This is a big advantage we have over other investors overseas who have to pay large percentages of their earnings in tax.
Unfortunately, if you are a day trader, you may end up having to pay tax on your gains. The local tax authority will determine if your profits are taxable based on the frequency and volume of your trades, the interval between each trade and the manner in which you finance the trades. Day traders who make multiple large trades a day are more likely to end up having to pay taxes compared to long-term investors who are most definitely exempt from tax from their profits.
Most day traders fail
The unfortunate reality is that most day traders fail. According to Business Insider, as many as four in five day traders end up losing money. As you may have guessed, this comes down to the huge cost of trading and the mismatch of information between professionals and home day traders.
The Foolish bottom line
Don’t be fooled (with a small “f”) into thinking that day trading is as simple as many make it out to be. It is by no means an easy job which also led Business Insider to describe it as “one of the dumbest jobs there is”. Hopefully, this article clarifies some of the misconceptions that may arise due to all the inaccurate marketing that we so often see on the Internet.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.