When an individual considers buying and selling monetary contracts within the same trading day to avoid the unmanageable risks of overnight trading, and negative price gaps that come along are known as day traders. Yet, day traders take dicey chances to claim the high bounty.
How Does Day Trading Affect the Economy?
Day trading helps the world economy because it increases the liquidity in the market. In addition, day trading is indirectly beneficial for the economy because it increases competition and lowers world prices, and indirectly helps consumers by raising the purchasing power of their income.
Additionally, trading breaks down domestic monopolies, which face local competition from more efficient foreign firms!
The fact that day trading manages the markets’ prices and provides liquidity for the investors brings in the consideration that it is beneficial but inexplicitly.
However, when done with expertise, one can help in boosting the requirement for commodities of local economies.
Let’s take a look and understand how an individual can be a day trader. Also, we’ll look into how local and global economies are affected by day trading.
Characteristics of a day trader
An individual can be considered a day trader when buying and selling financial instruments (positions) within the same trading day. The trader does this to reduce the risks associated with the price gap between one day’s close and the other day’s price at open; also to escalate the profits gained from a sole trade. However, as marked earlier, day trading requires expertise, which in the end, also brings pricey risks of failure for the traders, ultimately resulting in an excessive risk of trading.
To bring in the most out of every contract, day traders keep a constant eye on the stock markets and prepare a handful of approaches to succeed.
An additional requirement of which the day trader needs to be aware is, though one can gain huge benefits from day trading, it still has the uncertainty of losing everything in a single go.
Below mentioned are some salient points regarding day trading that one needs to keep in mind:
Day trading and investing are not the same
Investors tend to reserve positions for a longer time, whereas day traders hardly engage in a trade for at most two days.
Day trading fails to assure big fish.
As compared to other trading approaches, day trading is quite tricky and complex.
Day trading can be nerve-wracking.
Day trading demands one’s constant commitment and awareness of the market. Day traders put in their efforts throughout the trading hours. They also have to keep a continuous check and keep their facts in check, even during their time off. If an individual considers having a relaxing lifestyle without any hustle, then the job of a day trader should not be considered, as day trading may get exhausting.
Advantages of day trading
If an individual has good enough knowledge of how trading occurs, then day trading can bring you an n-number of benefits. So let’s take a look at why day trading is worth a shot.
Easy reach to global markets
Day trading has become a significant part of the enlargement of foreign markets. To safeguard the rate of change of stocks, a day trader deals with positions throughout the day. This change results in creating an equilibrium in a particular contract/position. Anyway, this remains a short-lived remedy for the growing markets.
Apart from this, day trading ensures companies with regular buyers. To trade a position, the day trader needs first to acquire that position. This uplifts the organization because eventually, a customer or buyer needs to purchase the funds, which ultimately boosts the prices, resulting in the company’s growth.
Prosperous day traders pass their fortunes to small markets.
A succeeding person always brings success to local markets as well. We are very well aware that if day trading is done correctly, it always leads to winning, which ultimately results in the trader getting lucky and successful. This success also leads to a boom in the local market as the purchase of local commodities increases, which leads to a rise in its demand. This ends up resulting in more jobs for the country. Less the number of jobless people, the higher the economy.
Easy cash flow in markets
The higher number of buyers and sellers in the market results in liquidity in the markets. Moreover, as day traders purchase the positions daily, they ensure that they can hand over the monetary amount to the trader and investors at the earliest.
This allows the buyers to liquidate their stocks at their convenience, which was only possible because of the day traders. Unknowingly, day trading is most beneficial to people interested in investing their money in protracted stocks or gold.
Drawbacks of day trading
We all know every coin has two sides; similarly, while day trading may seem quite a money-making strategy, on the other hand, it too has its fair share of drawbacks.
Here are some of the reasons contradictory to the previous section.
Relying on your charm
Humans and their belief in superstitions have always been the villain of day trading. Yet, it is amongst the popular arguments in the case of trading.
Most people consider their luck as their prime strategy during day trading, while we are very aware that luck plays the magic; instead, it’sit’s magic of hard work and knowledge of the day trader. Relying only on your stars is an awful idea while trading and even more pathetic in the case of day trading, as day trading draws in higher risk factors.
We, humans, tend to exaggerate things, and so happens to be the case here. People start feeling overconfident when things start turning in their favor. This results in people investing more and more and taking higher risk factors. They begin to have this belief that nothing will go south.
Hindrances behind trading platforms and apps
The internet has leveled up and given the path to many people seeking some source of income. Moreover, there has been the freedom to a persperson’sent. It has allowed them to release their music album without any famous branding; it has allowed one to publish their book under their publication. If the internet has caught the attention of such popular industries, how could it not catch the attention of the trading field?
With the growth of the internet, there is also a fair share of growth in trading platforms and trading apps. An individual can start their investment and day trading with a minimum share of $100 as well. Though this might seem appealing to many of us, the truth is that these platforms do not provide free services ultimately. These apps constantly prompt a user to continue investing. Through this strategy, these platforms keep users in the illusion of investing while earning money.
Greed is something that always keeps a person interested. These trading platforms raise a per person for money by supplementing them with several offers. This has turned the trading industry into a gambling industry which ultimately ends with luck.
This trading approach becomes gambling as it leads to crucial losses, which, in the end, lowers the economic rate.
The reality of day trading
Many traders go bankrupt or in debt while trading, but there is a silver lining to only 1% of traders receiving better returns than the investment in funds with low expense ratios.
Though amateur day traders would be on cloud nine when they incur huge profits, they start believing they are amongst the family of the silver lining (the 1% traders). But reality hits their faces when the markets go in the opposite direction of theirs.
Highs and lows of stocks
Stock investment may seem an excellent choice for investing money for the distant future, but one should only invest in them if one can bear the losses faced when the stock goes down. Day traders deal with positions daily, but this plan fails and can result in a recession, which can be dangerous.
There could be cases where you hear a stock price may strike up and you invest in it, but instead of going up, it keeps on falling down each day until its value reaches zero.
This again takes us back to the question that had arisen earlier.
Is day trading bad for the economy?
No, day trading is not bad for the economy because the increase in liquidity on the market is beneficial on a daily basis. On the contrary, day trading increases competition, lowers world prices, and indirectly helps consumers by raising the purchasing power of their income.
On the one hand, day trading does bring a rise to the country’s economy. It balances the prices in the market and also allows equity capital in trades. Day trading also benefits the local economies as well as the international markets.
Day trading can result in an individual going under serious debt if not appropriately practiced and can turn out risky for amateur traders. However, this can also lead to a decline in the country’s economy as there remains a great extent of indebtedness.
One can assert that this is a long-term problem because the success ratio is only 1%.
Day trading is an immensely debatable topic, but when done correctly with proper knowledge and awareness, it reduces the risk of debt for the traders and the economy.
If done correctly, day trading can benefit the trader and the economy, but they rally in the underlying risk of debts.
Day trading balances the demand and supply in the markets. It also increases the liquidity of the assets for the users.
Like every trading approach, this, too, helps only those who know the market and are ready to put in hard work and remain consistent with it. Unfortunately, however, even a tiny mistake can hurt the trader as well as the economy.