Ok I guess I need to explain day trading so you guys realize it is shit. Day trading means you buy the stock and never hold on to it for more than 48 hours (excluding weekends). This means you will generally be buying and selling stock each day.
So you have to pay a fee to buy it and you have to pay a fee to sell it. With a day trading account you generally have to have 20+ grand in the account at all times.
So if the stock goes up 10% in one day and you sell for a 10% gain you aren’t getting a 10% Rate of Return. The fees eat day traders alive.
As far as most traders at firms being day traders that is 100% false. Not sure where you heard it but it isn’t true.
At most firms the trader is alloted a certain amount of money…we’ll say 100k. Of that 100k they are only allowed to have a certain % lets say 10-20% in one stock. Also, unless it is industry specific, they generally can’t have a majority in just one type of industry.
Ok so lets see how this works in practice with our example.
Our trader buys 20k worth of Walmart which makes up 20% of the portfolio. The trader then buys 20k worth of another traditionally high performing stock.
The trader now has 60k left to invest but has already invested in their top performers. So now they piddle around and spread that 60k out over a variety of companies for diversity.
This diversity is shit. Diversity means equates to you usually not losing a ton but you’ll never make a ton unless the whole market is going crazy. So this diversity basically breaks even or even loses money for the trader.
So at the end of the day/quarter/year the trader made a good rate of return on the top performers…lets say 20%. Thats pretty fucking good return. But, since he had to spread the rest of the money around the outcome isn’t quite so good. The report is in and the other stocks only made 3% rate of return. Thats not very good unless you are a bank.
Now when the trader sits down to calculate his real return. 40k at 20% = 8000 profit and 48000 in all. The 60k at 3% = 1800 or 61800 in all. So the total is 48k + 61.8k or 109800. So the total ROI was 9800 or 9.8%. That isn’t a bad rate of return but it is a far cry from the 20% return the trader could of potentially made.
The sad thing is that the few good stocks traders pick can make 30-40% then the rest of the portfolio could actually be negative and bring the whole thing down to really low rates of return.[/quote]
Beginner question time, in the example the guy had a 9.8 % return. How is it that firms and hedefunds get returns like 40% if they are not day trading or atleast trading frequently during the quarters/year? Are the stocks they hold just growing dramtically?