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Pros and Cons of Day Trading Versus Long-Term Investing

Updated on March 15, 2018
Avik Chakravorty profile image

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Trading VS Investing

Introduction

Both Day trading and investing are feasible trading options, and as a matter of fact, the majority of traders exercise their option of doing both. Day trading typically lasts for a few seconds or minutes and within that very short time indeed the price of an asset fluctuates and a trader has to make a split-second decision to take advantage of asset price fluctuations in the short-term.

All positions in day trading open and close on the very same day. Investments, unlike day trading, aren’t made for the short-term; rather they are made typically for the long-term for a protracted period lasting for months or even years. The process of decision-making in relation to day trade as opposed to investment may not be similar for the most part.

Whether one intends to be a day trader or an investor depends to a large extent on the personality and skills of an individual which may vary from individual to individual. Any fund manager or financial planner would recommend investing in day trading as it’s a relatively passive income leading to generating wealth.

However, the uninitiated may be in a quandary deciding whether to focus their efforts on investing or trading and therefore guidance from experts every step of the way is essential. It’s essentially a learning process in regards the difference between investing and day trading. Capital requirements, time commitments, skills, psychology, and ROI are all variable factors and indeed unique to individual situations.

Capital Requirements

In the US for example, in relation to day trading stocks, it’s mandatory for a day trader to maintain a minimum balance of $25,000. There isn’t any legally mandated minimum balance requirement for day trader trading the currency markets though, but maintaining a nominal balance of at least $1,000 is advisable. Similarly, day trading futures requires a minimum account balance ranging between $5,000 and $7,500.

Investors typically invest in stock markets which are long-term investments in Futures with an expiration date and therefore Futures aren’t recommended for long-term trading. Using currencies for long-term trading is an option but the downside is that there are a handful of stable currencies that render a viable investment option. In contrast, there are far too many stocks and ETFs that a trader can opt for which can be used for trading futures and currencies indirectly.

The starting capital requirements of an investor would vary based on the type of investment the investor may opt for. If for example, someone intends to own a minimum of three stocks or ETFs then, in that case, there isn’t a prescribed minimum investment amount. However, when investments are relatively small, one ought to be mindful of the amount to be paid in commissions. Even though

the percentage of commission to be paid remains unaltered in comparison with the investment amount, what matters is the fee or commission which tends to be exorbitant on smaller investments. Furthermore, there is a commission to be paid while selling as well. Therefore it's recommended that amount of investment be fairly large assuming that one purchases one’s own stock.

Monthly investments into an employer’s contribution plan are essentially invested in mutual funds without any fee right away, rather, there are the nominal yearly fees levied and at the time of withdrawal of funds, additional fees have to be paid too.

Time Commitments

As far as committing time, a Day trader ought to dedicate a bare minimum of two hours towards day trading. Within the first hour of the U.S. markets opening officially for trading is ideally the peak time for capitalizing on huge price movements and traders get time to prepare. With lunchtime approaching stocks typically aren’t as active as they were during the first hour or two. Day traders ought to review their trade on a daily and weekly basis.

As markets are active and open, day trading is most lucrative for stocks, currencies, and futures. Moreover, global markets are more than likely to be active as they open; currencies and European stocks in particular. For U.S. or Canadian residents, the ideal times for trading are early morning or late at night. I these aren’t viable options for anyone then perhaps day trading isn’t one’s cup of tea as so to speak and one should consider investing.

Prior to actually making an investment, researching investment options are essential to evaluate the pros and the cons. There isn’t any particular time for conducting research and therefore research can be done at leisure regardless of a stressful work schedule. As and when funds are available for investment, dedicating only a few hours every month is all it takes to peruse and identify stocks that fulfill the criteria of one’s investment strategy which may be time-consuming initially.

Those intending to invest large amounts and are seeking several trading opportunities may have to devote few hours every week researching alternatives. Conversely, other types of investors may not be dedicating a lot of time on research, instead, they might want to review their investments every couple of months, probably as and when they are ready for yet another investment.

Skills and Personality Requirements

In any type of trading, one ought to seriously commit to a time for research and creating a viable strategy which one has to learn to implement effectively. New traders often go off on a tangent from their original plan as they realize that they may have to deploy funds that they may be emotionally attached to.

Day Trading and investing alike requires discipline as buying and selling ought to be done by responding to in-built triggers of the plan. Trading regardless the absence of a trade trigger is undisciplined and could very well lead to the investment performing poorly.

Patience is as much an essential attribute in Day trading as it is in investing but there are nuances of a day trader’s and an investor’s patience. Day traders actively trade throughout the day and yet they have to wait for the right moment triggering a buy or a sell. Observing every little fluctuation in price can be tempting for a day trader to make a trade when in fact it may have been a wrong signal. Investors too, ought to patiently wait for the right trade trigger. Unlike day traders, investors aren’t keeping an eye on the status of their investments all the time and therefore they aren’t as tempted to trade as day traders are. That said, investors nonetheless ought to learn to trade by observing charts and being alert for a valid trade trigger that may possibly lead to better opportunities.

Potential Returns

Potential returns from day trading and investing aren’t comparable in any way, shape or form. There isn’t any cap on investment and performance of the funds would be unaffected. Day traders, however, would probably witness the diminished performance in percentage terms even with accounts worth several hundreds of thousands of dollars as deploying large amounts is harder on trades that last a few seconds or minutes.

As investments are profitable daily they earn daily compound interest which means interest income more than quadruples in addition to the deposited principal amount. As a result, an account could inflate rather quickly. The downside is that the account of a day trader could plummet gradually if, for example, a day trader loses even 1 or 2 percent of their principal amount each day.

Individual investors, for the most part, are relatively better off as accumulation of capital isn’t an issue for them as there are plenty of stocks available to opt for and a much longer period for accumulation and disposal of held stocks.

As investments are usually held for the longer term, the compounding is relatively slower. If investments are on-going for many years until the end of the term then profits would be realized. However, the profits or gains can’t be re-invested for further ROI. The advantage or benefit of shorter-term trading is that there is rapid compounding.


Best Investing Strategy - Swing Trading/Day Trading/Long Term Investing

© 2018 Avik Chakravorty

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