Four Reasons Not to Trade Stocks
Another important investing rule required to get you on the right investing path is to avoid trading stocks and the stock market. It has been proven again and again by research and analytic reports that stock trading does not beat a buy and hold strategy. In fact, it does the opposite. Trading stocks is high risk and here are some of the reasons why:
- Trading systems do not work. If they did, then everyone that used them would be multi-billionaires. Also, because of the rule of arbitrage, any system that might work momentarily will lose its advantage as soon as the system is employed by others. It is possible that a handful of traders have a platform that makes them money, but highly doubtful.
- Trading stocks is expensive. Making multiple trades a day and hundreds of trades a month is expensive. Even at the lowest priced discount brokers, these fees add up to hundreds of dollars per month.
- Trading stocks is an adminstrative nightmare. Each month you have hundreds of trades to sort through. And at the end of the year you must match trades together and try to optimize your gains and losses for your income tax filings. There are lots of rules like the wash rule that make it difficult to report your trades on your tax forms.
- Trading stocks is very risky. When trading you make big bets on the direction of a given stock or market. When these bets are wrong, you are left with big losses. Making the wrong call can cost you months of market returns and lead your portfolio to heavy losses.
In summary, trading is NOT investing and traders rarely ever make the kind of money investors make. Always stick to fundamental research and stock analysis. Don’t try to read charts and make trades based on information you think no one else has. The stock market is efficient and you will be wrong as many times as you are right. Trading stocks increases your tax rates (short term versus long term) and your investment expenses and will also vastly lower the returns on your money. Instead, find investments you like and stick with them for the long haul.
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