HomeTradingDay Trading vs. Investing: What's the Difference

Day Trading vs. Investing: What’s the Difference

The financial market is a very complex and overlapping industry that consists of many different directions.

Some of the most popular among them are forex, stocks, and crypto and after choosing the proper industry for you, the major question in this regard is whether to start day-trading or investing.

Sometimes, people even choose both.

What’s the Difference Between Day Trading and Investing?

After choosing the proper industry that you are going to become involved in, the main aspect is to analyze what is the difference between trading and investing. In terms of buying, the main purpose is to sell it at a specific price, while in the case of investing, the purpose is to hold it until it gains value.

When it comes to selling, when you are day trading, the main purpose is to buy it again at a specific price, which will be more acceptable in terms of profit for you, whereas in the case of investing, selling happens after a long period of gain.

There is one of the major differences in regards to time horizon when in day trading it is one trading day, and in the case of investing the investor is holding the assets for more than one year.

One of the most frequently asked questions is the initial capital requirement since it makes a major difference for the beginner. The capital requirement for day trading of stocks is a minimum of $25,000 and none for forex and futures when in the case of investing the initial capital varies from hundreds to hundreds of thousands of dollars.

Last but not least, the costs in the case of day-trading is depending on the number and size of the transaction and in investment, capital gains, and management fees.

1. Day Trading

When the trader is using the day-trading method it means that he/she is buying and selling an asset in a short period, such as minutes or even within seconds. In this case, all the positions are closed after the end of the working day.

There are certain countries, where to execute the legal day-trading activities it is necessary to connect with the brokerage company who are providing the traders with the proper assistance, first and foremost maintaining, for example, daily forex account balance, also known as the margins.

In terms of day-trading with stocks, the minimum capital requirement starts from $1000, while in the case of futures day-trading, the best start is considered to be between $5000 and $7500.

One more additional aspect that should be considered before trading is the fees and finding the brokerage company that has an effective percentage of commissions that will not affect the efficiency of your trade. For example, the average brokerage commission fee is 7% per trade, meaning that if you gain a profit of 100$ with stock at a certain trade, the 7 dollars will be deducted from your total profit.

2. Investing

Investing, meaning long-term trading is more possible in the case of stocks rather than futures, which have expiration dates. A long-term period of investing is possible without the initial deposit if the trader uses exchange-traded funds. Investors frequently wait for the price to rise so that they might get an edge.

There are occasions where investors maintain their assets for decades, which is a much longer length of time that makes a significant impact. This indicates that the investor is not relying on the investment to support him or her. Rather it is a future source of income.

However, not all financial markets are advantageous for investing, for example, stocks or cryptos, particularly bitcoin, are seen as excellent long-term investments.

However, in the case of long-term investments, the client may be required to pay extra expenses, such as management fees, over a lengthy period, such as management fees, redemption fees, account fees, etc.

Day Trading vs. Investing Personalities

Whether you are involved in day trading or investing, the feelings that are accompanied by the process sometimes are mutual, such as fear of loss or the feeling of excitement in the case of a successful process.

The major difference between those two is during the decision-making process. In this case, the day trader needs to be focused for the whole day sitting at the computers, while the investors are required to settle their emotions and have the patience to wait for the long term. Day traders, on the other hand, need to be focused and full of energy for the whole day, until the end of the working hours.

Day-traders are motivated to gain their profits daily and it requires them to solve the problems in a short period and as efficiently as possible, this is why day-trading is not good for starting it as a hobby. On the other hand, those who are patient and do not want to be sitting at the computers all day and have more of a “set and forget” attitude will most probably invest, rather than start day trading.

Risk Evaluation

Risks are inseparable parts of either the trading or investing process and none of them guarantees the profits, however, the thing that should be taken into account, in this case, is to evaluate the balance between the loss and profit, and if profit overlaps the losses then it is more likely worth starting.

In terms of day trading, it is obvious that the profits are not as big a percentage as the final result of investing, meaning between 0.5 % to 3%, however, it is a quite significant amount at the end of the month. The obstacles are required to be answered and solved immediately since one little problem is capable of making the whole trade unsuccessful. A trader has to be focused for the whole day to avoid the problem or any kind of delay.

However, in the case of investing, the problems are not required to be solved within seconds since it is spread over a long period and little changes do not make as big a difference as in the case of day trading, however, the investor is more likely to lose a larger amount of money if something does not go as planned than the trader.

Day Trading or Investing: Beginner Should Choose?

Finally, to sum up, the beginner should choose between day trading or investing depending on the conditions that they have. If you have a full-time job but want to become involved in the financial market without committing to computers and charts daily, then investing is a better option.

However, if the trader is willing to dedicate himself/herself to the trading process and gain profits daily, then day trading is the better option.

When the beginner also wants to consider risks, yes it is true that in the case of investment, the likelihood of losing a large amount of money is more intense, however, in the case of the day-trading risks are a member of the daily activity and intensity feels harder.

Ajeet Sharma, the founder of Financegab and a well-known name in the field of financial blogging. Blogging since 2017, he has the expertise and excellent knowledge about personal finance. Financegab is all about personal finance which aims to create awareness among people about personal finance and help them to make smart, well-informed financial decisions.


Most Popular