When looking at different forms of securities trading, you will come across day trading and investing. Both of these involve trading in the financial markets to make a profit, but they are two very different strategies.
The biggest difference between day trading and investing comes down to time. Day trading is a far shorter strategy, focused on quick daily profits, while investing is a more long-term strategy focused on a bigger profit further down the line. If you want to learn more, we have a great list of the best day trading apps on our site.
|Buying and Selling
|Buy and sell stocks in the same trading day
|Buying stocks to hold long term
|$25,000 (PDT Rule) for Stocks
None For Forex and Futures
Day trading is the process of buying and selling assets over very short periods. This is done to take advantage of the fast rises and falls in the market. Day trading transactions can be done within minutes, or even seconds.
- As the name suggests, a day trader will open and close all of their transactions within one day. Day traders do not have any transactions open overnight, and they start again the next day. Frequent daily trading mainly focuses on stocks, forex, and commodities, although other instruments are also used.
- In the most simple terms, day trading is done by buying at a low price and selling at a higher price. The focus is on quick returns, with day traders trying to gain better returns than buy-and-hold investing. The aim is to make profits within a set time (in this case, one day), instead of waiting out the market.
- Day traders make use of protective stop-loss orders. These will automatically close any open positions at a price that has been decided on in advance. This helps to avoid losses.
- Day traders make use of various tools and analysis techniques to closely watch the markets and understand when they need to open and close transactions. Unlike the “set it and forget it” approach of long-term investing, day traders need to be consistently alert and aware of the movements in the market.
- Day trading requires the use of a broker. It’s important to understand the fees involved in day trading because closing multiple transactions within one day could result in high fees that eat a significant chunk of your profit.
Long-term investing follows the opposite approach to fast, profitable day trades. While day trading is focused on making a profit each day, long-term investing focuses on building up long-term wealth for the future. This is a much more extended form of trading.
- Investing involves buying a portfolio, and holding onto it over time as it increases in value. This portfolio can include things like mutual funds, stocks, bonds, and various other instruments. Investors will often reinvest any of their dividends or profits to help strengthen the long-term outcome of their investments.
- Long-term investors will hold onto their investment for years at a time. This approach takes advantage of things like interest and dividends to increase the long-term value of the portfolio. Investors will ride out times when the markets drop, with the expectation that their investments will eventually recover and continue to grow.
- Long-term investing is usually done with a certain goal in mind, usually retirement. The idea is to put away money for months, years, or decades, and withdraw it at a later stage when its value is far greater.
- Some common forms of long-term investing include 401(k)s or IRAs. Investors are not concerned about the small daily, weekly, or even monthly fluctuations in the investment. Long-term investors are solely focused on the consistent, steady growth of their portfolio over their set investment period.
Day Trading vs Long Term Investing Risks
Whether you’re trading or investing, there will always be an element of risk involved. Anyone getting involved in the financial markets should be aware of what they could potentially lose.
Day trading is a trickier business when it comes to risk. This approach is focused on small return percentages each day (usually around 0.5% to 3%). If a day trader makes small losses each day, then their capital will quickly start to decline.
Day trading also involves faster, and more informed decision-making. If you make a wrong decision, it could lead to a fast loss of capital.
Long-term investing always involves less risk than fast trading. Market downturns will happen, but investors that stick them out eventually come back out on top. However, downturns can belong, and successful investors need to hold onto their securities through this period.
The risk may be lower in long-term investing, but it requires a bigger commitment.
Day Traders vs Investors
Day trading and investing require two very different personalities and approaches. Both need to have a good understanding of the financial markets, and both need to be prepared for risk and losses. There are certain decision-making processes and skills that set each type of trader apart.
Day traders need to be able to make fast decisions, facing short-term challenges each day. Day traders need to be constantly alert and up to date with the markets. They need to monitor the markets carefully to be able to make smart, fast decisions. Day trading is not an approach for patient people.
Long-term investing does require such an intensive approach. Investors do not need to make daily decisions, and they can turn a blind eye to the markets and just leave their portfolios to accumulate over time. Long-term investing requires patience and persistence.
There are various approaches that you can take when entering the financial markets. Investing and trading are two separate methods, each one with its own advantages and disadvantages.
In general, new investors should look towards long-term investing – especially if they are doing it for something like retirement. Day trading is a good way to make quick returns, but it requires plenty of market knowledge and significant capital to start with.
Both methods work, it's just about knowing which one best suits your goals, market knowledge, and personality.