Day 98 : Should you do day trading?
You might have heard people say that you can make a lot of money with a small investment with futures and options.
While that is true, it is extremely risky and has more chances of losing money than gaining.
According to Nithin Kamath, only 1% of traders make more than FD returns.
Futures and options are sophisticated products and are not investments for regular investors.
With futures, you can even end up losing more money than the capital you invested.
Options expose you to large amounts of a commodity or stock for a small premium. This is what leads to big gains and even bigger losses.
Unlike stocks, options have an expiry date. So if your option expires out of the money, you lose your entire investment.
Daniel Kahneman, the father of behavioural economics, framed a loss aversion theory. He said that losses are easiest to accept when they are small, but it only gets tougher to exit as they get bigger.
Hence, when you own options or futures, it only gets harder with time to exit the position since the value of the premium keeps decaying with time.
Most short or intraday trades turn into long term positions because of such losses.
Besides, high-risk investments with low capital rarely work. If they fail, you lose your money, and if they do great, your capital invested is not enough to make a huge difference.
Hence, as Peter Lynch advises, it is best not to know what futures and options are. It will keep away the urge of trading them.
98/100
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