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One of the most surprising developments in the investment world over the past two years has been the flood of younger investors entering the market. According to a study from GOBankingRates, an incredible 72% of Generation Z respondents that are invested in the market only started within the last six months.
The rise of commission-free trading apps and the big gains posted by cryptocurrencies — at least until 2022 — no doubt drew many of these newer investors into the markets. But can Gen Z investors really strike it rich through day trading? Or is the hype more than the reality?
What Exactly Is Day Trading Anyway?
Day trading is something of a generic term that refers to frequently buying and selling securities in the open market. For some, day trading means buying shares of stock and selling them again sometime during the day, while for high-frequency traders, “day trading” means moving shares of stock as fast as every second or even quicker.
For a Gen Z-type day trader, this usually means buying shares of stock on a commission-free app sometime during the day, then closing out that position before the end of the same trading day. However, sometimes the term “day trader” is also colloquially applied to those who buy one day and sell the next.
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Rewards of Day Trading
The biggest reward of day trading is that you can potentially earn a lot of money in a short period of time.
For example, if you know the Federal Reserve is having a meeting and you think their mid-day announcement will move markets higher, you might buy an S&P 500 index ETF in the morning and then sell it after the announcement. If you’re correct you might make 1%, 2% or even more on that trade within a matter of hours.
In the crypto market, same-day moves of 10% or higher are not unheard of, so deft traders can profit handsomely if they call the trend correctly.
Risks of Day Trading
Although to some it may seem “easy” to make quick money through day trading, it’s just as likely that you will lose money. It only takes a few days of losing 10% of your trading capital before you’re in a hole too deep to crawl out of. Remember that if you lose 50% of your bankroll, you’ll need to earn 100% just to break even, and that’s math that ultimately tends to wear down even smart or lucky traders.
Although no-commission trading apps have taken away the cost of frequent transactions, you’ll still have to pay short-term capital gains taxes on any profits that you do earn, meaning you won’t benefit from lower long-term capital gains rates. But still, the biggest risk of day trading is that you will blow all of your capital. Even if you strike gold once, you have to be a consistent winner to avoid giving it all back.
Can Gen Z Strike It Rich Through Day Trading?
If history has taught us anything, it’s that the younger generation is innovative, forward-thinking and ready to tear down past institutions in order to make things better. For the most part, these are admirable traits. But history also shows us that those who think that “this time it’s different” generally learn harsh lessons, particularly in the financial markets.
While the broad access to commission-free trading that has developed over the past decade is likely a net benefit, it also opens the door to financial pain for those who don’t have investment discipline. This is true whether we are talking about Gen Z or any other age of investors. However, as Gen Z has adopted trading apps and cryptocurrency more readily than many older investors, they are more susceptible to the downsides of day trading.
At the end of the day, yes, there are certainly a number of Gen Z investors that will strike it rich through day trading, whether through skill, luck or a combination of the two. But historical studies have always shown that the vast majority of day traders end up losing money.
There’s nothing wrong with speculation or day trading, but it should only amount to a very minor portion of an investor’s entire portfolio. While quick trades and fast profits are certainly adrenaline-inducing, they usually amount to nothing more than short-term profits that eventually evaporate — much like winning in a casino. For this reason, most financial experts advise that 5% or less of a portfolio be dedicated to speculation or day trading. This way, even if those trades burn through your entire bankroll, your long-term portfolio can still remain intact.
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