Gamble on day trading? Lousy interest rates made me do it!
Last week I did something incredibly dangerous and stupid that goes against all my financial common sense.
I made a day trade.
That's where you buy a stock, hold it for just a few hours and then sell at a quick profit if the share price rises -- or a loss if it slumps.
To make matters worse, I traded in an incredibly dangerous company whose shares have lost two-thirds of their value in just three months: Netflix.
After watching the stock rebound for a day, I decided to take a gamble and try to capitalize on the momentum. All I really wanted was to earn a few percentage points.
On Jan. 4, around midmorning, I used my ING Direct account to buy 38 shares of Netflix at a price of $77.25 each plus a $9.95 commission.
To be exact, my entire investment was $2,945.
I sold the lot about a half hour before the close of the market when the stock hit $80.22.
Minus the $9.95 commission, I netted $3,039 from the sale. That's a profit of $94 or 3.2% of my original investment.
Now, $94 isn't much money, but a 3.2% return in the course of a few hours is darn good.
Why did I make such a risky move?
Because at this point I'm willing to do some dangerous things to earn a decent yield.
Consider that, had I locked up my $3,000 in certificates of deposit for a year, I would have only earned $45. And had I let it rot away in a money market account for a year, I would have been lucky to earn $30.
With those kinds of pathetic prospects, I see no choice but to take on some risk.
It is a horrible time for us savers.
I save and save, but there are no risk-free options that can even keep up with inflation, let alone make a profit. It's like I'm standing on a treadmill. I'm moving along (making contributions) but just not going anywhere.
Back in 2007 when I was earning almost 6% risk-free on my money in a high-yield online savings account, I didn't even have any non-retirement funds in stocks. And doing something like this would have been totally out of the question.
In this case, I scored, but you have to remember my trade could have gone the other way around.
I could have lost 3.2%. I could have lost 5%, 10% or more.
Consider that on Oct. 25, 2011, when Netflix announced the loss of almost a million subscribers, its share price plunged 35% in one day.
Had I made my move that day, I could have lost well over $1,000 in the course of a few hours.
Or, had the stock value dipped a few percentage points during the day, I could have gotten scared and sold before it rebounded.
So how do you know when these things are going to happen? How do you time it just right?
You don't and you can't.
No matter how much CNBC you watch, how many websites you read, you don't know a darn thing about which way the market, let alone your stock pick, is going to head in the next hour or next day.
Investing in stocks needs to be done regularly and with a long-term view.
My normally sane approach to equities is reflected in a story I wrote for Interest.com last year: 5 smart moves to build a stock portfolio.
Day trading isn't much different than walking into a casino and putting a few thousand dollars down on the poker table.
I just got lucky that day.