Should you invest? Unequivocally, the answer is yes. It is an effective way to put your money to work and create wealth. Making wise investment choices can help you outpace inflation, increasing the value of your savings. In today’s world, it is more or less a necessity. Since, due to currency volatility, keeping funds in the bank does not ensure financial security anymore.
Technology has now leveled the playing field, making trading a possibility for all. Of course, this is not a risk-free activity, as there is a chance that your investments can produce lower-than-expected returns and even lose you money. Thus, it is in no way a sure-fire way to profits, but a process that requires research, business-savvy, and quality decision-making en route to capital gains.
In general, two main approaches to trading on the stock market exist. These are day trading and long-term investing in securities. The essential difference between these is the activity level and the position holding times involved. Each one has its pros and cons, and we go into analyzing them below, trying to aid you in figuring out which method is best for you.
Table of Contents
Day Trading Explained
As the name suggests, day trading is the practice of buying and selling securities within a 24-hour window. It entails traders making short-term moves, and it is not uncommon for these to last mere seconds. Those engaging in this practice get referred to as speculators, often using leverage such as margin loans to earn money. Day trading gained popularity due to the degradation of the US commission and the rise of electronic trading platforms. Naturally, the stock price volatility during the dot-com bubble era also helped.
As a rule of thumb, most such traders are not laypeople looking to turn a buck. They are professionals employed by sizeable financial institutions. They know how to use the nuances of financial instruments like options, stocks, currencies, interest rate futures, commodity futures, and stock market index futures fluctuate. In essence, day trading is nothing more than swing trading. That is where assets get held for several days in anticipation of a market swing. Nevertheless, here, the wait can be only a few milliseconds long.
It is vital to remember that there are no legal capital requirements for day trading. However, fees can put a dramatic dent in your profits if you are using a broker. Their commissions are in the 5% to 10% range. Hence, trading more is not always cheaper, as you can start losing money due to an increased overall volume when you have a perception that you are gaining funds. That said, day trading can be enormously lucrative if you can recognize opportunities and keep track of the news. No overnight crisis can affect your income. It allows you to succeed in unfavorable market conditions by utilizing short-selling strategies and focusing on technical and fundamental analysis regarding companies’ general management information and financial statements.
What Is Long-Term Trading?
Long-term trading is what people know as investing. It involves patience, putting money in stocks that can generate a profit over an extended period. The principal thing for most long-term investors is focusing on risk-adjusted returns with low turnovers and diversification. The latter is super important as it helps reduce volatility. Broad-based investing portfolios are less likely to lose funds when compared to concentrate stock allocations. Moreover, diversification does not only apply to buying and holding different stocks. It also refers to diversifying in terms of asset classes.
Long-term investors are not consistently looking for home runs, to use a baseball analogy. What they are hoping for is a reliable stream of base hits. They want to stay in the game as long as possible. They are not on the prowl for a quick fix but are looking to tread, keeping away from the red, outperforming inflation, seeking potential long-term returns.
Is Day Trading Gambling?
The reason why people often compare trading with gambling is that they both involve speculation and risk calculation. Yet, despite the similarities of these two concepts, the truth of the matter is that no amount of analysis can help anyone 100% accurately predict outcomes in both. Individuals indulging in gambling and day trading can believe that they are making well-informed decisions. Yet, their return-on-investment probability still relies on aspects no human can control or entirely foresee.
The main difference between these two activities is that casino-style gaming features a built-in advantage for the operator. It guarantees that the entity offering games of chance will profit in the long haul. That is a theoretical timeframe. In trading, traders have more tools to increase their profit probability, despite the total uncontrollableness of the market.
Investment Advice
Most experienced brokers will advise clients to invest in what they know. That means only to buy stocks of companies operating in industries they understand. Additionally, investors must recognize how to notice value, the importance of buying early, price does not always equate to value, and news is sometimes only noise, not essential information. While most will say that diversification is vital, Warrant Buffet warns that it can also be dangerous. In his opinion, quality opportunities come infrequently. So, when people spot a decent one, they should go all out and bet the house.
About Carson Derrow
