Security trading is one of the best ways to put your money to work and earn significant rewards. However, it is not as simple as ABC. While many people have built wealth by investing in different assets, some have lost money through their investments.
There are two major approaches to investing in the securities market: day trading and long term investment. Both are viable means of making money, but you need to understand and find the one that suits you and approach it the right way.
Day Trading vs. Long-Term Investing – The Difference
Day trading in the securities market involves making trades that last for a few seconds or minutes. It is a type of trading tactic that takes advantage of short-term fluctuations in an asset’s prices. All positions are opened and closed on the same day.
Long-term investing, as you can expect, involves making long-term trades in the securities market. Here, trades are sparingly made, and assets are held for months and even years and can often yield steady return with time.
Choosing the Right Strategy
The difference between day trading and long-term investing is not limited to the time duration of the trades. The capital requirements, skills, and strategies, as well as potential returns differ considerably, too. It is important you consider the two options based on these important criteria when choosing the strategy to adopt. Here are the most important factors to consider:
There is a general belief that you will need a lot of money to invest long-term, but can start with very little cash if you want to day-trade. This is not entirely true. Yes, a big long-term investment can yield significant returns, but day-trading with little money can be disastrous. It is even impossible when you want to day-trade stocks in the U.S. (you need to maintain a brokerage balance of at least $25,000).
Furthermore, there is no minimum capital requirement to trade in the currency market, but it is recommended that you start with a thousand dollars, at least. Since the cost of trading (broker’s commission, mostly) can be hard for those trading with little money, it is better to day-trade with a substantial fund. It is also possible to make little long-term investments. The return may be tiny, but it is ideally less risky than day-trading.
As the name implies, day-trading requires daily commitment. You will have to spend at least two hours each day, analyzing the market and racking your brain to determine the right moves to make.
Long-term investing, on the other hand, doesn’t require such commitments. If you know you don’t have the time to be going over the market conditions daily, long-term investing is a better option.
Skills Requirement and Personality Traits
To succeed as a day-trader, an investor needs to be skillful and disciplined. Some levels of skills and emotional discipline are also required for long-term investing, but you can’t really compare the two in this regard. Day-trading puts a lot of capita on the line on a regular basis, so you have to know what you are doing at all times, entering and exiting the market at the right moments.
It is very difficult to draw a parallel between the potential returns of day-trading and that of long-term investing. This is because they differ significantly in the level of effort and time commitment required. With day trading, you will make returns frequently, and this can add up to significant profits in the long run. But again, it is risky, and the chances of maintaining a steady run of profit-making are slim. Long-term investments, on the other hand, offer stability and what you can correctly describe as passive income.