Conventional investors buy stock in a business and hold on to their assets for extended periods.
This is the old-school view, but it does not appeal to young people. They are keener on riskier undertakings like day trading. Here is a look at this prominent trend of 2020.
What causes so many people to disregard the traditional methods and trade corporate stocks in a frenzy? This year, many youngsters have discovered mobile apps which allow them to access the stock exchange. Many of these new users had no prior experience, and their results were lacklustre at best.
Reasons for Scepticism
There is no denying that systems like forex trading can be lucrative for educated users with good foresight. But now, even unemployed people think they can make up for lost income using an app like Robinhood.
That is why O’Shares ETFs Chairman Kevin O’Leary has compared day trading to gambling. He told CNBC Make It that it should not be defined as investing at all. To make matters worse, this year, due to the pandemic, we see unpredictable risks, according to Barbara Roper, director of investor protection at the Consumer Federation of America. Many day traders disregard the unprecedented nature of the market situation.
Think of Warren Buffet, the most famous value investor in history. He made the buy-and-hold strategy legendary. Speaking at the 2017 Berkshire Hathaway shareholders meeting, the investment veteran mentioned the “casino characteristic” of financial markets which attracts people because they “like action, and they like to gamble”. However, the day of reckoning always arrives, sooner or later.
The new generation of day traders refuses to take the long view. They are not interested in owning shares in good companies. They only want to make a quick profit on price moves. Historically, long-term investment in mutual funds or passive funds tracking indices like the S&P 500 has shown better results than stock picking.
Is It All Bad?
Thanks to apps, trading is now more accessible than ever before, and it is also trendy. On the one hand, users make risky decisions and squander their capital if they are foolhardy. On the other hand, young people develop an interest in investing and trading in general.
Traders start exploring different markets, including Forex and derivatives like CFDs. They are inspired to improve their financial literacy and to learn more about other ways to make money. With time, the risk-takers of today may recognize the value of the long-term view. Seasoned investors look down on day trading, but it does have an upside.