There’s a growing industry dedicated to persuading you to trade stocks. It includes not just trading apps like Robinhood, IG and eToro, but large brokerage firms and investment platforms too. It also includes financial media outlets which depend for their livelihood on advertising revenue from those very same apps, brokers and platforms.
The message conveyed to consumers is that trading is a way to make money fast. But that’s not a fair reflection. Of course, you could strike lucky and pick a stock before its shares soar in value and sell it for a big profit. But, as my latest article for Minchin Moore explains, you could easily lose all or most of your money. In fact, once their costs are factored in, the vast majority of people who trade stocks fail to beat a simple low-cost index tracker in the long run.
It has never been easier to trade stocks in individual companies. In the 1970s, buying or selling shares usually required making an appointment with a stockbroker. Today, you can own a stake in any publicly listed company in the world within seconds on your smartphone or tablet.
Trading apps spend a fortune advertising their services, and the impression consumers are given is that trading stocks is the way to make money, and make it fast. The reality, sadly, is rather different.
The key thing to understand about buying individual stocks is that the vast majority are duds. Research has shown that, in the long run, only around four per cent of US stocks outperform Treasury Bills (in other words, US government bonds).
That’s an amazing statistic. To put it another way, you have only a one-in-25 chance of identifying, in advance, a stock that will give you a better return than one of the safest investments there is.
Minchin Moore Private Wealth Advisers is an evidence-based financial planning firm with headquarters in New South Wales, Australia.
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