Day trading is the process of buying and selling stocks within the same day, or even multiple times a day says Brian Colombana. The practice can lead to fast profits and huge returns, but it’s also very risky. Here’s what you need to know before trying your hand at daily market trades. What Is Day Trading? According to Investopedia, day traders are investors who “take advantage of intraday price movements with high volume speculative trading that is based on technical analysis.” As an investor, you’re most likely already familiar with long-term investing.
That’s when you buy stocks (or another type of investment) and hold onto them for months or years until you sell them for a profit. Day traders, on the other hand, buy and sell the same stocks within a single day. Some people will even do multiple trades throughout the same day to capitalize on short-term changes in price. This is done with the goal of earning profits on every trade, using both an increase in stock price (again) or a decrease (a loss).
Investopedia notes that most individual investors aren’t willing to make dozens of trades per day; they tend to be long-term investors who prefer not having to watch their investments as closely. Since daily market trades are extremely risky, you need more than just interest in investing—you’ll also need enough money to cover initial trading fees and potential losses since many of your trades could end up making no profit at all.
Day Trading vs. Long-Term Investing
- In this example, when you’re a long-term investor you’d buy the stock in January and hold onto it until December. When you’re a day trader, though, you could trade that same stock several times in one day to take advantage of short-term changes in price.
- While both strategies have the goal of making money off your investments, they offer very different advantages and disadvantages: Pros of Long-Term Investing You can make big profits over a long period of time if the stock’s value increases over time. If Apple is trading for $100 today but skyrockets to $300 within five years, for instance, then your initial investment will be worth a lot more. You can make thousands of dollars if you take your profits and reinvest them into other opportunities. The process of watching your portfolio closely is rewarding as well as educational, allowing you to learn about the market as a whole as well as individual companies. In essence, long-term investing gives you an opportunity to build wealth over time through patience and smart decisions. Cons of Long-Term Investing As mentioned above, day traders can earn money from both increased prices and decreased prices within a single day—you double your chances for success! That said, long-term investors only have one chance at taking advantage of increased stock value. If Apple’s stock rises from $100 to $150 in five years but then drops back down to $100, your initial investment will lose value instead of gaining it. While there’s more risk involved in short-term trades, the potential profits are much higher. Pros of Day Trading You have a better chance at making money right away.
- By trading several times within a single day. You can buy low and then sell high over and over again without waiting for years to see results. Successful traders know how to take advantage of market fluctuations—as soon as something changes with the stock’s price. They react accordingly explains Brian Colombana. This is especially beneficial if you’re using an online platform where investments are automatically sold once they’ve reached a certain point. That way you don’t have to sit around watching your portfolio or hitting “refresh” on your browser all day long. Some day traders will even limit themselves to specific types of stocks (like penny stocks, for example) that others might consider risky and/or unstable. Cons of Day Trading You’ll pay fees every time you buy and sell a stock. This is one of the biggest reasons why most individual investors choose long-term investing instead; they’d rather save their money than spend it paying commissions at every turn. There’s also the chance that you won’t make any profit on each trade. If your initial investment goes down in price instead of up (and vice versa) says Brian Colombana. Then there’s the fact that successful day trading is difficult. You’re not just competing against other people trying to buy low and sell high. You’re also competing against fast computers with complicated algorithms that are programmed to analyze the market in mere seconds. Overall, if you’re smart and patient enough to learn how to day trade successfully, then by all means do it! Just be aware of the risks involved—there’s no guarantee you’ll make money on your investments.
The main difference between long-term investing and day trading is LIQUIDITY. Brian Colombana explains liquidity refers to movement or activity within an account. Day traders, perhaps due largely to commissions and fees. Benefit from more liquidity while investors benefit from less liquidity (but at a lower fee).