Day Trading vs. Long Term Investing
June 18, 2009
Day traders and long term investors can both make money in the stock market. The different approaches of buying and selling stocks vs buying and holding them require different strategies and come with different levels of risk.
Day Trading
Day trading has been a part of investing for a few decades now. Before 1975, all commissions on trades were set at the same rate. The SEC at that time made fixed rates illegal. Discount brokers rose out of that decision and changed the landscape of investing. The practice of day trading didn’t really come into it’s own until the great bull run of the 1990’s though.
In the mid-90’s, an individual could almost close their eyes and point at a stock in the Wall Street Journal and make money on that trade. People started quitting their jobs and mortgaging their houses to take advantage. Unfortunately all good things must come to an end, and so did the run on the market when the Tech Bubble burst. The chaos and carnage this created in day trading circles is legendary.
So what is day trading? It is the act of buying a stock and then selling it in the same day, or a short time later. It is a very intense, hands-on practice. Day traders watch the markets and monitor their trades the entire time the market is open, looking for short, quick movements in a stock to get in and out.
While day trading is risky, it can also be extremely lucrative. It’s also an accountant’s nightmare. Later this week we’ll dig a little deeper into trading stocks and take a look at some day trading strategies.
Long Term Investing
When you think about the word investing, things like “buy & hold” or “Warren Buffett” probably come to mind. Mr. Buffett, arguably the best investor of all time, has made a living out of buying a stock that he feels is cheap, and holding it until it goes up. A long term investor does not buy Disney stock because he thinks it’s going to pop because they are releasing another Pixar movie. He buys it because he believes the company is going to be here twenty years from now, still making Pixar movies. He can hold that stock, for however long, enjoy the dividends and then sell it down the line when necessary.
Tomorrow we’ll talk about building a stock portfolio and how you can use a top-down or bottom-up approach to diversify your investments.
Day Trading vs Long Term Investing
One way to look at the difference between day trading and investing for a longer term is that a trader will either sink or swim by trading through a market storm. An investor will ride through the storm and see what happens on the other side (usually).
Investing in stocks is difficult and not for the easily squeamish. There are dangers at every turn, but also rewards. There is only one guarantee, no matter which style of investing you choose; you will NOT get bored.
Traders are traders, whether they are day, week, or month traders.
Traders are hunters, investors are farmers.
Traders need to hunt all the time or they will starve to death. Good hunters can hunt lions with tremendous effort, bad hunters easily get injured or killed. Their success highly depends on skills and also luck.
Investors pick the good lands and farm for years. They believe the soil of their lands is rich, so they hold on to their lands through different seasons and weathers. Their success depends on patience and the prices paid on the lands.
That is a fan frigeen tastic analogy. Well said sir.