Is Stock Trading Actually Profitable?
Top commission-free stock broker - eToro
Stock trading can be incredibly profitable if done successfully, though the number of stock traders who manage to make a profit ranges from 1% to 50%, depending on the source. For lower risk and a higher chance of profits, formulate a detailed trading plan, use low-cost trading platforms, and implement stringent risk management strategies.
-
50% of stock traders: Profits after expenses, short-term stock trading (Garvey & Murphy, 2005)
-
20% of stock traders: Marginally profitable, slightly above NASDAQ100 (D.J. Jordan, 2004)
-
13% of stock traders: Consistent profits, Taiwanese traders (University of California, 2004)
-
< 1% of stock traders: Significant positive returns after expenses (Brad Barber, 2014)
Anybody who decides to trade or invest in stocks, does so with the hopes of making a handsome profit. The question that often arises however, is how profitable is stock trading exactly? It’s difficult to pinpoint an exact figure, and a countless number of sources will give you very different impressions.
In this article, we look at some of the research into how profitable stock trading is, breaking down some of the numbers and giving advice on how to maximize your chances of profit.
-
Is stock trading a good way to make money?
Yes, stock trading can be a great way to make money, so much so that tens of millions of people around the world trade stocks professionally. However, it does come with risks, and the average stock trader actually loses money. The key to successful trading is to have a coherent and detailed trading plan, learn everything there is to know, develop a fact-based methodology for trading, employ discipline, and stringently manage risk.
-
Is stock trading profitable or just a scam?
Stock trading is not a scam, though if you don’t know what you’re doing it can certainly feel that way. The world’s stock markets are strongly linked to the health of its economies and are made up of thousands of legitimate companies, so it’s quite impossible for stocks to be a scam. However, recklessly trading high-risk stocks, without knowledge or a strategy, can lead to heavy losses and appear scam-like.
-
Why stock trading is gambling?
There are superficial similarities between gambling and stock trading; the seemingly unpredictable price movements, the risk-reward balance, and the speculation involved. However, unlike with gambling, with stock trading, you can develop a market understanding and use technical and fundamental analysis to assess a stock’s prospects, and gain an advantage over the ‘house’, rather than just playing the odds game and depending on luck.
-
What percentage of stock traders are profitable?
The exact numbers differ depending on the source. Some research puts the number at 1% of day traders being profitable after costs and fees, while other studies have found half of professional day traders turn a profit. Some long-term studies have found that 97% of day traders lose money over time. Statistics from the popular trading platform eToro (which specializes in stocks) show that 51% of retail investor accounts lose money.
Is it true that 90% of traders lose money?
If you’ve been scouring the internet, trying to find out whether stock trading is profitable, chances are that you’ve encountered the widely circulated statistic that 90% of traders lose money. The truth is that it’s almost impossible to get an exact number. There are over 60 stock exchanges in the world, and an estimated 10 million stock traders worldwide, of which 10% are supposedly day traders. Numerous studies have aimed to give a specific number of how many of them are profitable traders – often with wildly varying results. Let’s look at the profitability numbers put forward by some credible studies:
-
Half of Traders: The 2005 study by Garvey & Murphy, “The Profitability of Active Stock Traders”, examined the profits of 1,386 day traders mainly in the US but also abroad, and found that roughly half of them turned a profit after costs and fees. These traders mostly traded the same select stocks, capturing profits within the same few minutes or hours per day
-
20% of Traders: A famous 2004 research paper by D.J. Jordan titled “The Profitability of Day Traders”, found that about twice as many day traders lose money as make money. 20% of their sampled traders were “more than marginally profitable”, and their performance correlated with movements in the NASDAQ100 Composite Index
-
13% of Day Traders: Multiple websites across the internet cite this statistic: 13% of day traders were consistently profitable, according to a University of California study. The study they’re referencing is a 2004 Berkely research paper on day traders in Taiwan, titled “Do Individual Day Traders Make Money? Evidence from Taiwan'', which found that less than 20% of day traders profited after costs and fees
-
Less than 1%: A 2014 study by esteemed economic analyst Brad Barber titled “The cross-section of speculator skill: Evidence from day trading” found that only 1% of day traders were able to “predictably and reliably earn positive abnormal returns” after fees and costs
We can see from these numbers that the ratio of stock traders who consistently turn a profit, after fees and commissions, is anywhere between 1% to 50%. However, those who tended to perform better were more likely to be heavy traders and professionals.
In terms of how much return profitable traders are likely to see, numbers also vary. Data from the Financial Industry Regulatory Authority (FINRA) shows that for individual investors, the median profit from day trading in 2020 was $13,000. Their evidence also shows that an investment below $50,000 significantly impairs an investor's ability to make a profit. Meanwhile, online recruitment and job data website Zippia indicates that the average salary of a day trader is $116,895 per year.
Most of the numbers we’ve just looked at only take into consideration stock trading, meaning frequent buying and selling to capture small to medium-sized profits. When we look at the profitability of investing instead of trading, the numbers paint a different picture. Investing in blue-chip stocks or in stock market indices are less risky and consistently profitable ways of profiting from stocks. Let’s look at some examples:
-
S&P500: The S&P500 stock market index, which serves as a benchmark of the performance of the US stock market, has provided an average annual return of 11.02% from 2014-2023, and a total 10-year return of 174.1% as of February 2024. The stock market generally grows over time, though may suffer downturns that cause fluctuations over time. With a long-term investment approach, investors are almost guaranteed to see healthy returns
-
NASDAQ-100: Similarly, the NASDAQ-100 Index, which is made up of 101 of the biggest US companies, has a 10-year return of 419.34% as of March 2024. The average annual return for that period is 18.0%
-
Blue-chip Stocks: Stocks from large, well-established and financially sound companies are called blue-chip stocks. Well known examples are The Coca-Cola Company, Pfizer, ExxonMobil, Visa, AT&T, and many more. Annual returns on blue-chip stocks vary widely, coming in at anywhere from 10% to 100%. The challenging part for investors is deciding which stocks to buy
One of the major challenges when attempting to profit from trading or investing in stocks, is the timing. Let’s imagine a budding investor, who we’ll call Frank, wanted to invest $10,000 in the year 2019. If Frank had purchased 10k worth of NVIDIA (NVDA) stock in March of 2019, he would now have a whopping $209,000, due to a 5-year increase of 1,945.90%. If he’d invested in META, he’d be up 193.51% over the past 5 years. However, if he’d invested in META in November 2022 (when the stock dropped to $90), he’d now be up roughly 440%! The prices of individual stocks and stock market indices can fluctuate massively, so entering a trade/investment at the right time is key.
Best stock brokers
How to increase profitability of stock trading?
While there’s no guaranteed formula for ensuring that you consistently generate profits via stock trading, there are steps you can take toward improving your chances.
Some of those steps are:
-
Use Stock Scanners: Consider using stock scanners, which are instruments that identify potential trading opportunities based on specific criteria that you set, such as price movements, volume, and technical indicators. They allow you to sort through thousands of individual securities to find ones that match your investment approach and needs, increasing likelihood of profit
-
Test Different Strategies: Experiment with various trading strategies, including day trading, swing trading, and long-term investing, to identify what aligns best with your risk tolerance and market conditions. Remember that day trading will likely provide higher returns (if done right) than long-term investing but involves higher risk
-
Build Specific Trading Plan: You should never enter any costly activity without an idea of what it is you’re doing and why you’re doing it. Develop a comprehensive trading plan outlining your goals, risk tolerance, entry and exit points, and overall strategy. Having a well-defined plan helps in making disciplined and informed decisions, rather than trading based on emotions or impulse
-
Consider ETFs: ETFs are a type of index fund that tracks a batch of securities, often from different asset classes. ETF returns vary, but average about 7-10% annually. They may be a safer option for beginner investors who are unsure which stocks to pick
-
Consider Robo-Advisers: Robo-advisory services, which use automated algorithms to manage your investment portfolio, may be a good option. Robo-advisors make investment recommendations based on your risk profile and financial goals, helping you to get the best bang for your buck
-
Keep Costs Low: More frequent trading leads to additional costs and fees, which can eat into your bottom line. Look for the platforms with the lowest fees, and make sure your strategy takes into consideration additional costs against your profit goals
-
Use Risk-management Tools: Implementing stringent risk management is crucial for preventing major losses and maintaining discipline in trading. One study found that 88% use stop-loss orders as part of their strategy for risk management – be part of that 88%. Stop-losses can prevent you from engaging in risky behavior like chasing losses, and let you adhere to a carefully laid-out plan
-
Rebalance Portfolio: A 2009 study found that investors tend to sell their winning investments while holding onto their losing investments, signifying the importance of regularly rebalancing your portfolio. Selling over performing assets can help to lock in profits, while maintaining a balanced portfolio that aligns with your initial investment strategy
-
Keep a Trading Journal: Multiple studies, particularly one by Barber, Lee, & Odean in 2010, have found that traders don’t learn from their mistakes while trading. Counter this by keeping a trade journal to analyze your past mistakes and avoid repeating them. Use your past experiences to continuously improve your trades
Put simply, one of the most proven ways to maximize profits when trading is to minimize costs. The lower your costs, the more capital you get to pocket. You can see a list of the best low-cost brokers, as researched by Traders Union, here: 7 Best Discount Brokers For Low-Cost Trading In 2024.
According to Alex Smith, one of TU's stock market experts: the peculiarities of the stock market provide opportunities to develop unique trading strategies. One of them is the dividend capture strategy.
Conclusion
Overall, it is difficult to put a number on how many stock traders manage to make a profit as figures vary from source to source. However, it’s safe to say that the vast majority of stock traders do not make a profit. To improve your chances of being in the successful minority, create a detailed trading plan and adhere to it, minimize your trading costs, employ stringent risk management, and consider using robo-advisors and investing in ETFs. Alternatively, adopt a long-term outlook and invest in assets that provide stable returns, rather than actively trading.
Team that worked on the article
Jason Law is a freelance writer and journalist and a Traders Union website contributor. While his main areas of expertise are currently finance and investing, he’s also a generalist writer covering news, current events, and travel.
Jason’s experience includes being an editor for South24 News and writing for the Vietnam Times newspaper. He is also an avid investor and an active stock and cryptocurrency trader with several years of experience.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.
Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.