Is day trading gambling ?

Is day trading gambling ? What prompted me to write this article was the fact that three events happened in succession one after the other.

The first was a visit by relatives who had an inkling fact that I was remotely connected to finance. Not really knowing what I do, their first question was “Where will Reliance shares go by December ?”. That is like asking a soothsayer by the side of the road when will Sachin Tendulkar retire.

The second event was a couple who signed on with us and their financial planning revealed that the lady of the house was into day trading to make money. She said she did make money but could not explain how the R 1 lakh of corpus she started with was Rs 30,000 now. You should have looked at the husband’s face when I asked those questions.

The third was the recent episode of the flash crash in the Nifty which was in the news all over.

The question I am tempted to ask myself is – Is day trading for ordinary investors  and is day trading gambling ?

Direct stock investing is tough

Let’s get some facts straight out of the door first. Ordinary retail investors like you and me cannot ever win over the big banks, brokerage houses and research desks as they have more information and sophisticated tools at their disposal to take buy and sell calls to make money. Our strategy should be to buy and hold scrips for the long term.

But that strategy works when you pick up a good scrip. And how do you know that ? No one knows – people have made tons and tons of money writing on the subject but you still have the biggest brokerage houses sleeping when a Satyam happens. My point is pretty simple – the ability to select a multi bagger is in no one’s control especially the ordinary retail investor. Direct stock picking works when you have a decent stock performing well in markets ups and downs – note that a decent stock performing decently in market ups is no fun – everyone could do that but the point is proven when the stock you pick performs when the market goes for a dive.

And that is something which retail investors cannot really do well on. Picking a good stock for long term keeps is a tough ask.

Direct stock investing is famous because of the greed factor – you think you can make money out of no money by picking a scrip which no one else has before you do.

Now imagine that on top of this you are convinced that direct stock picking and holding for the long term is not working wonders for you and you take to day trading. That is sacrilege without having answered the question – is day trading gambling or is it not !

Is day trading gambling ?

Day trading has a lot of myths surrounding it. The most common perception people have is that it is the easiest way to make riches each morning when the stock market opens. The modus operandi is simple – you switch on a few television channels where the anchors keep talking about the stock market as if their life depended on it and you get a few trading calls on which stock could possibly go up. Actually quite a few of those stocks do go up but within a few seconds of trade and the ordinary retail investor buys after that.

He then sits through the day, scratching his head and looking at the ticker wishing it inches up and looking at the news to wait for the next big news. When he does not make any money, he thinks he can make it big the next day. And so the cycle continues.

The issue with day trading is that it is a profession where retail investors try to make money with a skill they don’t posses. That is gambling !

The amount of time you spend on making so less money is just not justified. In fact, lessons across the world have proved that the amount of money you make via passive investing is almost equal or more than that you can make via active investing (aka trading).

Most of the ordinary retail investors never ever make money via trading. Those that do make small amounts lose it the day the stock market crashes big time. That is because with small amounts of profit that the person makes, he begins to take big risks. The big risk is either you can make lots of money or lose it all. The latter is what happens at the end of the day wiping out all the profits that the person ever made. After all, in gambling you will lose some day !

Now get this right – day trading is a bastardized concept for retail investors. In the greed of earning quick money by using a skill you don’t have, you are going to lose the money you do have.

If all the TV anchors, bank executives and brokerage research desks are so sure on their trading calls each morning, what the heck are they doing telling us about it  – they should do it themselves and get rich.

My advice to readers here is to stay away from trading and fall back to the passive investing strategy of investing via systematic investment planning of mutual funds. It is boring and does not bring with it the adrenal rush of the stock market but then there are somethings in life that are very very boring and we still like to stick to it.

Like watching Sachin Tendulkar in the hope he makes a century.