Day Trading vs. Investing: Which Is Better?
Day trading vs investing is a topic that makes many people hesitate to kick off their careers as a day trader or investors. Both the types have advantages and disadvantages so confusion and hesitation are understandable. This article mentions the main points so that you can easily differentiate between day trading and investing, and also, find the best strategy for your money!
What Is Day Trading?
When day trading, you buy and sell instruments within the same day. It means that overnight holding is rare to day traders. You can choose to speculate on options, stocks, futures, commodities, forex, etc.
What Is Investing?
Investors have been into the profits after a long period of time, such as months or even years. Warren Buffett is famous for holding Coke’s stocks for more than 40 years and enjoyed phenomenal profits!
So, investing involves the long-term holding of assets with the aim of generating high profits when investors buy the assets. You can invest in stocks, real estate, business, etc., expecting a fruitful path.
You might spot some differences between day trading and investing through the simple definitions above. Yet, the detailed looks can uncover the nuances and aspects that help you develop adaptable strategies and techniques!
How Different Is Day Trading From Investing?
Time Frames
Day trading is ideal for the short-term goals of income as it will complete within a trading day. Meanwhile, investing aims at the profits after long-term holding.
Specifically, day traders need to spend at least two hours per day monitoring and executing trade actions to earn high profits. There is a note that you should prepare for opportune moments to earn profits from large price moves after the U.S. markets are officially open within the first hour. So, it means that a day trader needs to commit from 15 hours to 40 hours on average per week.
Not daily commitment, investors spend their time and effort on developing long-term vision and strategies. It is not compulsory for you to trade every day or every hour but you can do it anytime!
Such an understanding can help you determine which is more suitable for you. If you love to have the cycle of money generation, day trading will be an ideal choice. Otherwise, investing is wonderful for those who have a long-term vision of their investments.
Initial Budgets
If you are into day trading, you should prepare at least $25,000. It is a reference for stock day traders. It includes the fees of your bets on trades and the commission fees for brokerage.
If you want to day trade forex, futures, etc., you should check more information about the required cost (if any) and the recommended budgets.
In particular, in currency markets, you can start at any budget level which you are most comfortable with. Yet, it will help if you have $1000 as a starting point. Meanwhile, the range between $5,000 and $7,500 will be ideal for those who love day trading futures.
On the other hand, investors also have a wide range of initial budgets, from a few hundred to thousands of dollars. For example, if you invest in mutual funds or ETFs, it will be helpful to know the related expenses, such as management fees, sales loads, redemption fees, exchange fees, account fees, purchase fees, etc.
Technical Analysis vs. Fundamental Analysis
Different goals lead to the difference in management and strategy development. Day traders gain profits thanks to smart tactics and flexibility to the ups and downs of price action every day. Meanwhile, investors will not pay much attention to short-term changes in prices and the values of stocks per se.
So, the tools and techniques that day traders and investors use are different. Specifically, technical analysis will help day traders decode the patterns of price movements to accurately predict the next moves. Thus, they can develop viable strategies based on such insights.
Investors, as mentioned above, do not care about short-term fluctuations. What they care about is the intrinsic value of the stocks they invest in. So, the fundamental analysis sheds light on the growth potential of stocks through various aspects, such as business models, competitive advantages, management, corporate governance, etc. The essential documents include the balance sheet, the income statement, the statement of cash flows, etc.
Risk Exposure and Profitability
Last but not least, risk and return are what you look for the most when considering day trading and investing.
The fast pace of day trading generates quick gains that range from 0.5% to 3% per day if you apply the right tracks. The percentages of return are usually high with small accounts. So, as your account size grows, it might drop down to less than 10% per month. Yet, high rewards have high risks — specifically, an account of a day trader can shift down with a daily drop of 1% or 2% of capital.
The definition of risk exposure to investors might be the same, yet the level of risk tolerance can be different. With stronger financial back-ups and long-term goals, investors seem competent to turn the tables as longer periods of holding can expand earnings. However, you need to be aware of tremendous losses when you are not capable of holding through a long period of downturns!
The Bottom Line
Day trading vs investing: Which is better might be a question that many aspiring traders and investors wonder about. Through the brief but spectacularly informative writing above, hopefully, you can see the importance of considering your own factors!
What we mean is that you need to determine your financial power — how much money of yours is ready for betting on either day trades or investments, your goals — whether it is for long runs or short terms, your adaptability — whether you can commit trading every day or would like to spend time doing other things, etc.
Once you can identify and be sure of such elements, you can easily find out which is more suitable for you!
References:
https://www.investopedia.com/terms/i/investing.asp
https://www.investorsunderground.com/what-is-day-trading/differences-from-investing/
