This is something that I had to learn for myself when I first started getting involved in the markets. I’ve always heard about investing and just figured day trading was a type of investing. After reading this article which pits day trading vs investing, you should be able to differentiate between the two terms and decide which road seems more inline with your own goals.
Time Horizon – The Biggest Factor
In case you can’t tell by the heading above, when you expect to profit has a lot to do with how these two terms differ. In both cases, the main goal of investing and day trading is to take capital that you own and produce a profit with it over time.
For a day trader, that time is usually a single day. A day trader will choose an asset to place his/her money and set a target price based on analysis done previously. Once that price is reached (if it is reached), it is instantly cashed out for a profit.
Sometimes these trades will go the wrong way and a trade with an expected rise in price will actually decrease in value leading to a loss. This is generally OK as long it is part of an overall strategy and through discipline, the trader is profiting more than losing. This form of risk management is what separates successful and unsuccessful traders.
Investing on the other hand doesn’t necessarily have a specific target in mind. An investor will see an asset that he/she believes will increase in value over a longer period (days/weeks/months/even years) and place capital there. This is generally not capital that is managed daily and is more hands off. Also, investments generally generate income over time as well.
Good investors have the discipline to leave their money invested even in turbulent times because they know that trying to time the market can often hurt their portfolio over time. They may be investing for retirement, a long term goal, as a legacy gift for their families or just to grow their net worth. The important distinction is that they do not worry about the day to day noise of the market and focus on their long term growth.
How About Some Examples?
Warren Buffett is an example of an Investor. He seeks out companies that he feels are undervalued and purchases large stakes in these companies. He will then hold these prospects as long as he is satisfied with the company’s business practices, products and prospects. Warren Buffett not focused on the price of the stock once he purchases it and instead is focused on the overall value of the company. He has a net worth of $85 billion.
John Paulson managed a hedge fund during the 2007 real estate crash. He predicted this crash through trading and made his fund $15 billion dollars and made himself $3.7 billion. Paulson was not focused on holding onto stock for long term. Paulson was focused on a specific direction in price and trading the opportunity.
How Does it Make a Return?
This is another distinction between investing and day trading. With day trading, the capital appreciation is the main goal. If you buy 100 shares of stock at $5/share and it rises to $10/share, a trader may close this trade for a capital gain of $5/share or 100% profit.
For an investor who buys 100 shares of stock, the company’s concern is more along the lines of when do they pay dividends, how much interest is being generated yearly and how strong the company’s company is. They will then continue to hold these shares as long as they are meeting or beating the company’s expectations.
Dividends are paid out generally quarterly and generate an income. In this case the stock investment is hopefully appreciating in value since the purchase and additionally paying out steady payments along the way. Most investors will reinvest these dividends to enjoy the benefits of even better returns over times.
Now Consider Your Home…
Many people would consider the company’s home, the company’s biggest investment. Is this an investment? Let’s think about it. Does it generate any income? No! In fact, it probably costs a lot of money when you consider bills, mortgage payments, repairs and renovations. Is it a day trade? Of course not!
You’re not going to buy a house and sell it within a single day. It is however somewhat of a trade in general. You purchase your home and probably plan to live the company’s a few to several years and hope it increases in value so you can sell it for a higher value!
Now, can a home be an investment? YES! If you buy a home and rent it out for a monthly profit, it is most definitely now an income generating investment. Hopefully you see the difference…
Which is Better?
This is a question only you can answer. How long do you want to tie up your assets? How much risk are you willing to take and how do you want to make your money work for you? Knowing how day trading differs from investing and comparing your own goals will help you determine how to allocate your money. Hopefully this article cleared up a few questions.
My recommendation if you have a hard time deciding is to do a little of both. Investing can be a lot more passive so place some of your money in long term investments that you believe in. You can read my article on how to find stocks to invest in for a good way to determine stocks that you might not mind holding long term.
Take some of the rest of your money and try short term trades. Make sure to do some good research though in order to ensure you are making safe and risk defined trades.
If you have more questions, feel free to leave a comment below. I’d love to hear from you! Also, feel free to share this with anyone that you think may benefit from this article.