Trading Stocks on Your Own

May 1, 2009

Playing the market without a broker is risky. Is it worth the gamble?


Ready to fire your broker and become a do-it-yourself trader?

You’d certainly have company. Day trading may have faded from the mainstream spotlight since the 2000 market crash, but today’s active trader community is supporting an entire industry of books, Web sites and live seminars, all dedicated to the notion that investors themselves are the best caretakers of their money.

And physicians - particularly in the more affluent specialties or those that tend to come with flexible hours - are taking notice.

“There just aren’t a great number of advisers who can serve me better than I can,” said one emergency room physician who drastically cut back his hours last October to devote most of his time to trading.

He’s not leaving medicine, said the physician, who, like other physicians interviewed for this article, requested anonymity because their trading ventures are not yet well-established. But he’s taking a couple of years to delve deeply into trading with the hope that this will be a money-making sideline that will take some financial pressures off his practice of medicine.

This midcareer physician said his passion for trading evolved from collecting mutual funds and Berkshire Hathaway Inc. stock more than a decade ago. He still attends Berkshire’s famed annual meetings, but as trading technology advanced and transactions costs plummeted for small retail traders, he started studying more about options, covered calls, and LEAPS (long-term options).

It’s difficult to pinpoint how many DIY investors there are today, but there are enough that virtually all of the major brokerage houses have business units devoted to them. In 2007, Forrester Research predicted the number of households engaging in online trading would grow 48 percent between 2006 and 2011, to 12 million.

Meanwhile, two new Internet sites - Traderplanet.com and StockTwits.com - are devoted entirely to do-it-yourselfers. Moneyshow.com, another free online site for traders, claimed to have 50,000 members early last year. The company hosts nearly constant live seminars around the country for prospective traders. Cheaper trading costs, better technology, and burgeoning online support communities are making trading flourish, said Lane Mendelsohn, founder of TraderPlanet.

Now for the sobering news: Despite all the excitement, most traders fail.

Several academic studies have concluded that individuals actually lose more money by trading than they would sitting passively in investments, and the losses mount as the trading becomes more active.

Many would-be traders lack the time and self-discipline it takes to truly succeed, says Adrienne Toghraie, founder of TradingOnTarget.com and a private trading coach who says she has had many physician clients.

Overconfidence is a huge problem for physicians who decide to trade, she says. The ones who study technical trading trends diligently and have a passion for it - as opposed to a passing fancy - tend to succeed.

A radiologist who spends about four hours a day making trades has been nothing but diligent. She set aside about $75,000 to invest with about four years ago - “I really considered it tuition,” she says - and has been carefully honing her skills ever since.

Her results? She’s still in the game, but is roughly even from where she started. That beats many investors who have lost substantial sums, but also is a stark reminder that her trading education is far from graduation day.

Still think you want to give it a go? Here are some tips from trading experts and investors themselves:

  • Study up. You spent many years training for a medical career - there’s also a big learning curve in trading. Several traders recommend reading “A Beginner’s Guide to Day Trading Online,” by Toni Turner. The primer starts with general, easy-to-read discussions about the psychology of trading, but quickly moves readers into learning the basic jargon and tools of active traders. One pearl: “Never, ever trade with money that, if lost, will diminish your lifestyle,” Turner writes. “When you trade with scared money, fear colors your decision-making abilities.”

Other books to consider: “How to Make Money in Stocks: A Winning System in Good Times or Bad,” by William O’Neil; “Trading for a Living: Psychology, Trading Tactics, Money Management,” by Alexander Elder and “The New Market Wizards: Conversations with America’s Top Traders,” by Jack Schwager.

  • Get a plan. The best traders have a business plan or trading philosophy that guides the types of trading they will do, how much risk they’ll take, etc., says Toghraie. “If you’re the type of person who can’t follow rules, you’ll spend as much time trying to conquer the psychology of trading as you will on the technical aspects,” she says.

  • Protect your downside. Given the huge volatility spike in the markets that began late last year, traders today are flocking to tools and educational seminars on managing risk along with finding the next hot stock, said Kimberley Schick, director of active trading services for Charles Schwab. “The key right now is managing against the wild swings,” Schick says.

Another way to mitigate risk is in selection of products to trade, experts say. For example, exchange-traded funds (baskets of stocks or bonds that trade on an exchange like a single stock and are typically tied to an index) are gaining in popularity with DIY traders because they don’t carry the leverage associated with derivatives and also don’t carry the individual risk of a single stock.

“I’ve gone from being a gunslinger to almost a grandma” in trading bravado, says the ER physician, who has scaled back his trading volume in an effort to avoid big losses. “I know the vast majority of people lose money at this, and I don’t want to end up like that.”

Janet Kidd Stewart is a freelance writer based in Marshfield, Wis. As a contributing columnist for the Chicago Tribune, she writes a weekly, syndicated retirement column called “The Journey” that appears in Tribune newspapers across the United States. She holds a bachelor’s degree and master’s degree from the Medill School of Journalism at Northwestern University. She can be reached via physicianspractice@cmpmedica.com.

This article originally appeared in the May 2009 issue of Physicians Practice.