A lot of students of economics think that they can use their knowledge of economics to accurately predict and make money off of the stock market. This post is designed as a warning to those who think they can accurately predict where the market is going consistently. You may have heard from friends, especially day traders, that they made $10,000 or more in a day. While their story is probably true, it is also likely the case that they have lost more than $10,000 in one day as well.
When you use your economics knowledge to try to “beat” the market, you are essentially speculating what the speculators are thinking. You are speculating speculation. Some will argue that fundamentals rule the market, and that solid knowledge of a stock or industry sector is enough to make money. This might be true in the long run, but in the short run you will experience the gains and losses based on the actions of the players in the market. And if you are reading this, you are probably not one of the “big” players, who actually have an effect on the market. You are simply trying to time your investments so you can profit off of the big players.
Another aspect to be careful of is following the bandwagon. In the late 90’s, many individuals opened up online stock trading accounts to try to take advantage of the good economy. The truth of the matter is that a lot of people made a lot of money in a few short years from online trading. But when the crash occurred, most of these people lost the money they made, and a good majority of them stopped trading. An article about the effect of this boom and bust cycle and the economics of online trading can be found at this academic site.
If you do want to pursue online trading, I suggest you go a few months making paper trades, to see how your investments will pan out. By paper trades, I mean that you “pretend” to purchase a stock, and follow it over time. This way, you can see how your strategies will play out without risking any money. Once you feel confident that you have done your research, you might start investing small amounts to get a feel for things. If you are like me, you will a little money at first, but I attribute this to the cost of education :). You also might want to check out online stock trading offered by Firstrade Securities.
Remember, investing in the stock market is NOT guaranteed, and risk is involved. It is important to be properly diversified, and understand what your goals and risk tolerances are. I believe it is fun to invest in the stock market, and it feels good to make money. But ESPECIALLY in these volatile times, it is very possible to lose money.
Disclaimer: I am not endorsing ANY investments in this post. Investing is a personal decision, and I highly recommend contacting a professional before any investments are made.