So now another interesting question arises: If your buy only goes against someone else's sell, is the practice of day-trading stocks a zero sum game? I do not believe so. Anyone trading on an exchange adds liquidity, and liquidity is what makes a market successful. Securities do not have time values in them the way that derivatives do. In the equities market, real wealth is both created and destroyed on a daily basis.
Consider this example: Microsoft is climbing on good news. A day trader buys 500 shares at 92, then sells them at 92 1/2, happy with a $250 gain for holding Microsoft over the course of 15 minutes. The trader sells those securities to a longterm investor who sees Microsoft appreciate to over $100 several months later. Both have won—which is not a zero sum game—because Microsoft is creating wealth by writing software that more and more people are using.
If a security is falling in price, the reverse is true. In other words, those in the chain who buy the security and then sell it at a loss have lost money, essentially because the value of the falling security as a whole has decreased, not because one group of market participants has that money at the cost of another group. The equities market is not a fixed-size pie in terms of the amount of money to be distributed. The size of the pie is constantly changing, and typically it is increasing, if you look over the course of several years. What keeps the stock market from being a zero sum game is that there is no preset time constraint on when you decide to realize your gain or loss, also that buying a security is buying part of something real. This is not the case with derivatives, as you will see later. If day-trading securities were truly a zero sum game, it would not be possible for very many individuals at all to profit by it. The professional institutions would have all the money, as invariably ends up the case in options trading.
I was interested to read a recent New York Times story that quoted a government report investigating day-trading practices after a tragedy in which a disgruntled day trader shot brokers at the brokerage company he was using. Clearly, this particular trader was a lunatic, and no general conclusions can be drawn from his actions.
It is worth noting, however, that if you blame anyone other than yourself for trading losses, you are missing the point. One should always do one's own analysis and decide on appropriate entry and exit points for oneself. Relying on others is just not a viable option in day trading. It is possible to make regular profits by day trading. If you do not, it is because of a fault in analysis, execution, or more commonly, in discipline.
The government report on the shooting incident only looked at 17 accounts and concluded that most people do not make money day trading. This, of course, was lambasted by the brokerage community as not being a representative sample. My main criticism of this government report is that it suggested that options trading offers greater leverage and is a better vehicle for those who want to profit from short-term movements in a security's price. The conclusion as to why traders do not use options trading was that this leads to a quicker loss of capital, whereas trading the securities themselves leads to a slower loss of capital. I totally agree that trading derivatives will, over time, lead to a loss of capital for the vast majority of people. To suggest, however, that options trading and day trading NASDAQ securities are the same activity, only being executed using different financial tools, is a crass misrepresentation.
