Published in El Pais, 23 June 2020.
The effects of the quarantine will be felt long after this is over. The world is going into a global recession with many jobs lost and many more to come as businesses start to downsize or just go under. With many unemployed and unable to find work this has caused them to see alternative ways to find income. One of them is day trading and the trading platform Robinhood is removing the barriers to make trading accessible to anyone, but is that good thing?
The object of the day trader is much different than traditional investment. Rather than make set deposits into an investment accounts with the objective of long-term gains over time, day trading involves holding onto stocks for a short period, hoping to take advantage of short swings that result in quick profits. Not only is this incredibly difficult to predict, but making a profit is further hampered by the trading fees, which often eliminate any profits made.
So how does Robinhood make such a thing possible? Well for one they have an educational section that supposedly helps you make more informed decisions, second, their fees are much lower which makes making a profit more feasible. Most importantly though they take advantage of “options trading”, trading that is only for short term investors and is seen as incredibly risky, if not straight up gambling, by professional brokers. Without going into too much detail about what option trading is, the user essentially has to predict whether the stock price will be up or down by the time the option expires, can be a few hours to a few days. If guessed correctly, they can sell the option to a trader wishing to purchase the stocks at a more advantageous price, if guessed wrong, their option is worthless and they lose everything.
The alure of a quick buck is always enticing but can have serious consequences and unfortunately one only has to look back a few days to see an example of this. One 20-year-old mistakenly believed that he had a negative balance of $730,000 dollars and took his own life. It was only revealed later that he actually had a balance of $16,000 and the simple misunderstanding of how options trading works led him to this tragedy.
Trading always takes inherent risks, day trading considerably more so than others. Like the casino, you should not be willing to invest more than you are willing to lose nor should this be seen as a substitute for a loss of income. However, like anything we should come up with our own decisions after taking the time to gather up all the facts.
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