Day-Trading vs Investing – There is a Difference.
Many first-time investors are drawn to the securities (stocks, commodity, forex etc) market due to the lure of making money. Over what period they can make the most returns will influence their strategy on capital deployment. Two common mechanisms that this capital will be deployed under are Day-trading and Investing.
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Simply put, Day Trading is the buying and selling of a security within a single market day (in its strictest sense). It involves taking advantage of gaps between the bid and the asks as well as trading on news or financial releases. This mechanism is considered to be riskier and therefore generally has a lower success rate. This is due to the speculative nature of the trade. However, if successful profits can be gained in a very short period, and if consistent, these profits can compound over time.
Never the less Day-trading is not without its critics. According to the Intelligent Investor by Benjamin Graham (Revised edition), ‘Day-trading is one of the best weapons ever invented for committing financial suicide’. This is due to no intelligence being applied to the trade therefore increasing the risk of losing money.
Investing as Opposed to Day-Trading
Unlike Day-trading, investing is not just buying and selling of a security because of a breaking news story with the goal of a profit, but is action based on fundamentals relating to that security. Investing is effectively trading based on intelligence. Intelligence in this case is data and information that enables the buyer to come up with an investment thesis. Investing normally takes place over the long term.
The goal in investing is to buy a security at a lower value today with the aim of gaining satisfactory returns in the future. This is considered to possess less risk in comparison to Day-trading due to the fundamental analysis that was done on the security of interest. Analysis is done with the aim of minimising risks and maximising returns. The returns can be made through capital gains or investment income such as dividends. According to Benjamin Graham, ‘an investment operation is one which upon thorough analysis promises safety of principal and adequate return’. However, not all are in favour of the timeline on this mechanism as many opportunities are considered to be missed. This can nonetheless be countered by the lower risk and the higher returns over the long term.
Test Your Knowledge
True or False: A person who only practices Day-Trading can only make money by selling his shares at a higher price.
Explain your answer.
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