The popularity of online brokerage services and the ease of buying and selling stock online make frequent trading easier than ever. But before you log on to your account and start hitting the trading button, you should first consider some of the disadvantages associated with frequent trading. From high brokerage fees to high taxes, there are many reasons why frequent trading can be a bad idea.
Those brokerage fees can really add up, even if you use a low-cost online broker. If you are a frequent trader, take a few minutes to review your brokerage statements and add up all of your trading costs for the last year. You might be surprised at how much you have been spending to buy and sell all those stocks.
Timing the market is something even expert traders have trouble doing. Your chances of successfully identifying the high and low point for any particular stock are pretty slim. When you try to make money with frequent trading, you have to be right not once but twice. You need to identify the high point from the stock so you can get out before it falls. You also need to be right about the low point for the next stock so you can get in and ride it all the way up. Your chances are getting both the buy side and the sell side correct are pretty remote.
Every time you sell a stock on which you have a gain, you generate additional taxes that must be paid. To make matters worse, the tax rate on short-term capital gains is much higher than that on long-term capital gains, so trading in and out of the stock market makes your tax situation that much worse. Before you become a frequent trader it is a good idea to talk to a tax expert or certified public accountant who can give you some insight into the tax consequences of your plan.
The high costs involved in buying and selling stocks frequently means you have to make a great deal of money just to break even. By the time you take your brokerage commissions, higher taxes and other expenses into consideration, you might find you have little left over for all your hard work. Buying and holding stocks or using mutual funds instead may be the better choice. When you evaluate the returns on your investment, consider all the costs of trading, not just the pre-expense profit you expect to make.