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Nowadays there are a plethora of apps that you can download and trade stocks on your own with zero commission. There have been a record number of people signing up for brokerage accounts ever since the pandemic induced market meltdown, but I wonder how many actually grew their wealth? Feel free to ask people around you whether they made money from the stock market consistently in the past year or two and I am sure the majority lost money. I will discuss why most of you will lose money trading stocks on your own in this article.
Trading vs Investing
A lot of people love bragging to their friends and family after they make a few bucks (figuratively speaking) in the stock market. They make some money and now they think they are the next Jimmy Buffett geniuses. I wonder if any of you have heard back from good old Jimmy after a year or two. They probably did not want to tell you they lost half their savings to save themselves from embarrassment.
Jimmy lost money because he was short term trading stocks and not actually investing in great companies for the long term. That is not to say trading stocks will not yield profits consistently but you will never beat the computer algorithms on Wall Street. Even if you do, it is temporary luck. Eventually, Wall Street will eat you alive. If you like to gamble, you might as well go to Las Vegas and play Baccarat. At least you get close to 50% chance of winning. Plus, you get free cocktails from attractive waitresses. With Jimmy speculating in the stock market he probably has less than 50% chance of making money.
Stock Market = Biggest Casino in the World?
Yes, everyone is gambling in the stock market. The difference between Jimmy and Wall Street is that Jimmy is pure gambling (speculating) while the most elite hedge funds are gambling with educated guesses. Hedge fund analysts pour countless hours into gathering as much information as possible on prospective companies so they can make informed investment decisions. If anyone can make money consistently in the stock market without investment expertise and information edge, why would Wall Street exist for so long? All the investment professionals would be out of work.
Please DO NOT Touch Options
Options are financial instruments that can leverage your returns, but they can also magnify your losses. You can lose 100% of your investment through options if they expire worthless. Everybody loves the adrenaline rush when your options are in the money, but it only takes a couple bad trades to wipe out your entire portfolio. If you don't know how to value options, you should not be trading them. Even the so called textbook Black Scholes model is based on assumptions built on assumptions, which is essentially worthless.
Last Words
I have seen countless friends and family lose significant portions of their net worth through gambling in the stock market. If you want to become rich and live the lifestyle that you desire, you need to be patient and invest consistently for the long term. Leave it to the professionals to manage your money. You don't see hospital patients trying to perform medical surgeries on themselves. Same goes for money management.