Posted on 28 July 2012.
Recent studies about how the rich acquire most of their wealth may tempt you to quit your job and start day trading. It turns out that almost no one joins the upper class by working and receiving wages. Instead, the wealthiest people in the world generate their wealth from capital gains. These are the returns that they receive on their financial investments. This realization explains why so many people have turned to day trading, either as a hobby or as a way to earn a living. Before you go down the same route, though, you should keep in mind some of the dangers that also lie down that road.
The earnings from each trade in a day trader’s activities are often very small. This is why day traders usually make multiple trades every day. To understand the audacity of this behavior, consider the majority of investors who pick a stock and watch it mature over the course of years before they even think about selling it.
This accelerated pace of trading leads to a key danger in day trading. Frequent trades mean frequent fees. Every broker charges a fee for trades. Though some brokers allow a certain number of free trades with new registration, eventually these are used up. If you do not get a broker with very low trading fees, then you might see your miniscule earnings gobbled up by your broker at each trade.
Another pitfall in a day trader’s life is the lack of diversity. Day traders usually do not have the diversified portfolio of the average investor. However, they can emulate some of the safety found in diversity by keeping sufficient amounts of cash out of the market. This can avoid the constant day trading danger of losing your all your money in one disastrous investment.
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