The risks of trading
If saving proceeds at a snail’s pace, investing is a slow and steady tortoise 🐢 – and trading a mad March hare. 🎢 It can be a high-risk, high-reward strategy. Traders don’t plan on holding their positions for years; often even days. Instead, they’re in ‘n’ out like a West Coast burger – briskly looking to buy low, sell high, and pocket the juicy returns in between. 🍔
While investors often pore over the “fundamentals” of the things they buy (a company’s annual sales figures, for instance), traders aren’t too bothered about what they’re trading.
All that matters to them are short-term market movements - which allow them to buy an investment (currencies are the most popular) and then quickly flip it for a profit when the price goes up. In the UK, small-time traders frequently deal in “contracts for difference” or “spread betting” rather than buying the often expensive investments directly.
Why do this?
The quick answer is… 🤷🏻
Some may argue that trading has the potential to bring really high returns in a very short space of time: if you get lucky (and lucky is a key term here), you can quadruple your money in the space of an hour. But you’d need to be really, really lucky.
There’s a Monet-level blurred line between trading and gambling: often, you’re just speculating on which way the price of an investment will move, and things could go horribly wrong – especially if you “leverage” your trades and borrow money to boost the size of your bets. 😬
Can you ‘guess’ a price move?
One concept all aspiring traders should be aware of is the “efficient markets hypothesis”. The idea is that modern markets are perfectly efficient, meaning that anything it’s possible to know about an investment – from Apple’s 🍎 quarterly costs to the likelihood of a new iPhone launch next year – is already reflected in that investment’s (e.g. Apple stock’s) price.
Related to this is the “random walk theory”, which says that the only things that can shift investment prices are random events that no one could ever have predicted. In other words, trading is a game of chance.
This theory is very controversial: there’s no real agreement on its accuracy. Some traders swear by their ability to make money off news and rumours. Others claim that undertaking “technical analysis” – looking at trading history and reading this across to the future – means they can back a winner. Some people may well have made a mint from trading, but many others will have been left with a sour taste. 🤢
You against the world
There’s yet another risk worth mentioning, which is that trading will pit you against some serious operators. Professional traders spend millions hooking up ultrafast cables to stock exchanges just so they can trade a few microseconds faster than you, and many now use complicated algorithms that automatically crunch data and trade on it. If you can make like John Connor and beat the robots, fair play to you – but it won’t be easy.
We’ll leave this chapter with one note: 80% of retail traders lose money within the first year…
As always, when you invest, your capital is at risk