If you’re active on social media, you’ve probably noticed plenty of people touting huge profits from buying and selling speculative stocks.
These big, one-day payoffs can make it seem like day trading is the key to financial security and success, but as always, there’s more to the story.
Before you put your money into anything, it’s essential to consider which investment strategy will suit your short and long-term goals best.
Here we take a closer look at two popular methods of investing in stocks: day trading vs. long-term investing.
Each carries its unique pros and cons, and choosing the right one can make the difference between money gained and money lost.
But before we dive into how to make the right decision for your goals, it’s helpful to have a grasp on the differences between each method.
How is day trading different from long-term investing?
As it turns out, there’s a pretty stark difference between day trading and long-term investing. Here’s a quick breakdown:
Day trading is a fast-paced investment strategy that involves buying and selling stocks within the same day, or even minutes or seconds after buying, depending on the speed the stock is moving.
The goal is to sell off once it becomes profitable, avoiding the potential for a stock to downturn overnight.
Day traders also must use the services of a stockbroker, which requires you to hold a minimum daily account balance, aka ‘margin’.
According to the U.S. Securities and Exchange Commission, all investors who trade four or more times in a span of 5 days must hold a minimum margin of $25,000 at all times.
Unlike day trading, more traditional investment strategies are about playing the long game.
In this type of investment, a person will buy a stock or other asset and hold onto it for months or even years, with the goal of seeing a large margin of growth over that time.
The most common type of assets long-term investors buy into are stocks and ETFs (Exchange Traded Funds).
Long-term investors also have more flexibility when it comes to the amount of money they want to put down and don’t necessarily need to maintain a minimum account.
Deciding which strategy is right for you
There’s a vast gulf between day trading and long-term investing. As such, you’ll want to seriously consider your goals and priorities before committing to either strategy.
Here are just a few things you’ll want to think about before jumping in.
What do you want out of your investment?
Are you looking to maximize your payoff potential? Day trading might align with that goal.
If you’re more interested in a “set it and forget it” investment that will likely yield a nice chunk of change over time, it’s better to be patient and invest for the long term.
Do you have the time/resources/understanding to day trade successfully?
Even if the thought of daily opportunities to challenge yourself and make a profit sounds appealing, you’re not going to get very far if you don’t have the right mix of time, resources, and know-how.
Day traders have eyes on their stocks at all times, making sure they never miss the perfect time to sell.
You also need to have enough capital set aside to open a brokerage account.
Lastly, it’s almost guaranteed you’ll end up losing money if you don’t have a good understanding of the current stock market and trends affecting your investments.
Consider your appetite for risk
Most people are naturally risk-averse, and there’s nothing wrong with that. If the possibility of losing a lot of money quickly gives you anxiety, then day trading is probably not for you.
On the flip side, if you have some play funds but don’t have the patience to wait potentially decades for an investment to come back, you might find the quick pace of day trading is more your speed.
Take the time to really think about your risk appetite – you might be surprised with how much (or how little) you’re willing to gamble on the stock market.
Why we recommend first-timers try long-term investing first
While stories of Redditors making 100k on their GameStop investment may have you seeing green, day trading is not for the faint of heart.
In fact, one study by the SEC found that 70% of forex traders lost money every quarter, and traders lost 100% of their cash within one year. And with the stock market seemingly more volatile than ever, it could be hazardous indeed to put money in without a clear strategy and goal.
If you’re investing for the first time, we recommend taking the safe route and investing for the long term.
Here’s a great resource on how to get started as a first-time investor.
Once you get a feel for the market, it may be worth taking a swing at day trading with a small investment and working your way up.
We highly recommend taking a course on trading from experienced investors to get you up to speed quickly.
The bottom line
At the end of the day, any investment carries a level of risk. But if you know how to play the market right, you can turn a small investment into a hefty profit.
Regardless of which option is best for your current goals, you’ll want to build a well thought-out strategy to help guide your decisions.
What’s more, you’ll want to learn how to navigate the emotional highs and lows that can come with investing. Whether you’re day trading or playing the long game, you’ll need a cool head on your shoulders.
There are a lot of nuances that can go into perfecting your investment strategy, and it’s always a good idea to go in as prepared as possible. Consider checking out our other investment articles to get you on the right track.