Q: My son has been furloughed and wants to start a new career. He has friends who are day trading and he has asked to borrow money from me so he can start. Is this a good career for him?
A: Day trading has increased in popularity since the coronavirus pandemic began. It could be that more people are not working or are working from home; either way, they may have a little more time. It’s also easier with free trading platforms, including mobile apps. But your question is important; is day trading a good career choice for your son?
Day trading is frequent buying and selling and usually positions are not held overnight. Often this is done using margin or borrowed money. BTW, these loans are where the “free” trading platforms make their profit along with the ‘minimum balance’ required in the accounts.
The idea (not sure it’s a career) is to view an electronic screen and guess which direction the position is going (up or down) and then buy the correct “instrument”. Popular during the technology bubble days, there are many instruments available to trade all day like stocks, stock options, currencies, futures contracts and commodities, just to name a few.
Increased interest in day trading may be related to the cancellation of so many professional sporting events. There aren’t any special qualifications needed to become a day trader, just electronics and money. In fact, it’s often referred to as a “game” and described as a “playing field”.The trader tries to determine which way positions will move and take an appropriate action.
Often people enjoy the thrill of the game and risk-taking. Unfortunately, studies show that odds are against the participants and loss aversion studies suggest that it usually hurts more to lose than feels good to win. The question begs to be asked, “Is the risk worth it?” It’s a stressful career and may challenge emotional well-being. Not to mention the ability to pay back a loan.
Short-term gains are taxed as ordinary income (unfavorable) and long-term gains (held for more than a year) are taxed at the favorable long-term capital gains rates of 15%, or even zero. Losses offset gains and losses without gains may reduce ordinary income by $3,000 per year and carry forward to the next year.
Consider exploring career options with your son. There are many online tests that will help match his interests and skill sets with careers and hopefully he will take this time to educate himself for his new career path.
And now that we’ve answered the question as to the career match, please keep in mind that a loan to a family member should be considered a gift. Let’s avoid family strife.
This is not sour grapes coming from an advisor; we take financial security seriously and don’t consider investing a “game.” This is written with the hope that your son will focus on what we know to be true.
If a career in finance is in his future, he will learn early in his education that market timing does not work. That money doubles every 10 years at 7% (the Rule of 72). That there may be free money from an employer with a 401K match. And that the solution to pollution is dilution, namely by creating a diversified portfolio that will limit risk. These basic truths will set him on the path of a good financial career.
Mary Baldwin, CFP, is an independent, fee-only financial planner at Baldwin and Associates in Indian Harbour Beach. Contact her with questions at 321-428-4555 or [email protected].
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