Over a cup of cappuccino, Rohit said, “Bro, you would not believe, I bought 100 Reliance shares at ₹1,385 and sold them at ₹1,397, cool gain of ₹1200 in a few hours”. Beaming with excitement and confidence, he leaned back and declared that he will do it again with 1000 shares next day. For Rohit, those quick gains were like a masterstroke.
As a friend I wondered quietly, was it really wealth building exercise, or just a lucky moment? Rohit sipped his coffee, dreaming of the next trade, unaware that markets routinely humble those who celebrate too soon.
Is trading good?
For many small investors frequent stock trading usually does more harm than good. Underneath all the excitement, the harsh reality for most small investors is that frequent stock trading is a losing game.
Trading can be loss making exercise
Many research conducted world over show that retail investors often underperform the market when they try to indulge in trading. Analyses by these researchers show that retail investors lose money to their overconfidence and excessive trade. Market tips and social media guide investors to make faulty decisions. Driven by the unauthentic information tips and ideas, the small investors often buy at high rates to sell low. Research indicates that small investors sell winners very early and keep losers for too long.
The illusion of success stories
A major hype created in the stock trading comes from the illusion of success. The media overwhelms readers with success stories of select few who made millions in stock investments. They rarely talk about the thousands of other investors who lose money trying to make quick buck. This creates a “survivorship bias” as winners get popularity, with no notice to the graveyard of failed traders. For retail investors, chasing these stories is like buying lottery tickets, possible, but highly improbable.
Is trading a zero-sum game?
Investors also lose to intermediaries and to taxes. Some consider trading as zero sum game where every rupee one trader gains, another loses. Ironically, it is not a zero-sum game as winner and loser both incur transaction charges and taxes. To accentuate the gravity of loss, the winners of day traders also pay taxes on gains that is clubbed with their other income to be taxed as per the slab. Once these costs are factored in, the average investor is statistically positioned to lose.
Low access to technology
Retail investors often fall short in the tools and technologies used by big players wielding AI, algorithms, and high-frequency trading (HFT). HFT firms, execute trades in microseconds with their superior reach, front-running retail orders for tiny profits. AI-driven algos amplify volatility, triggering market movements that are caught by machines, while retail investors are slow to react. Lacking speed and data access, individuals face asymmetric liquidity and turbulence, often selling low in panic.
Best approach is to be realistic and remain away from hype
Many portray stock trading as the fastest way to build wealth. The trading apps will routinely send notifications to purchase securities for big gains. Social media make it seem that buying and selling shares is the smartest way to build wealth.
This morning a notification on my mobile took me to an article highlighting a big profit opportunity to buy reliance communication ltd at about ₹ 1. Having bought shares of the company at about ₹ 615 per share in Jan 2008 and averaging multiple times in next few years, I squared-off, very late, to burn my fingers. Selling last set of shares at ₹ 105 in May 2013, I was happy that at least I could save some future losses.
With my past experience with the stock, no amount of positivity in the article can make me invest in the company. However, some people, swayed by the content of the article may invest. Whether and how much money will they make is a question that can be answered only by time.
Trading ≠ Wealth Building
The biggest myth of stock trading is that it builds wealth. In reality, wealth comes from:
• Compounding over long term
• Consistent investing
• Diversification, not speculation
Trading focuses on short-term moves. Investing focuses on building wealth steadily over decades. For retail investors, the trading vs investing decision is simple: investing wins almost every time.
Endnote
The myth of trading as a shortcut to riches is powerful, but the data indicates that trading potentially destroys wealth of small investors. Additional costs in form of fees by intermediaries and taxes stack the odds against retail traders. If the goal is financial security and growth, the smarter path is patience, disciplined investing and not chasing short-term trades. Wealth can be built easily over a longer time horizon by carefully planning risk and rewards. While it is important to invest in securities markets for their superior returns. The investments must be done cautiously without too much risks.
It is better to be tortoise and be slow but steady to win the race of stock market investing.
Also read:
Very correct information. Day Traders and short term investors lost their wealth but they don’t disclose the fact. As you rightly said long term investors only create wealth.
Thanks Sir! Short term trading lures people to put in their money to often lose it.