When you hear of investments, the first thing which clicks in mind is the duration of investment followed by the return. Usually all investments provide good return if the capital is invested for longer durations, but what if someone wants to get returns in a single day? It is possible through intraday trading, where you can complete your trade in a single day and exit. There can be profit or loss depending on the market. It is a risky affair but is also the most practiced form of stock market trade.
The major difference between long-term investing and day trading revolves around time. The goal of long-term investing is to build wealth over a long time by carefully creating a portfolio of stocks and assets such as mutual funds, bonds, and other financial instruments.
Day trading, on the other hand, is an approach where the trader buys and sells shares very frequently within a single day. Multiple orders are placed within a single day to secure profits from the volatility of the market. Based on their needs and investment ideology, people choose to either trade as intraday traders or long-term investors. Day trading and Long-term investments both have several advantages over each other
1) Personal Temperament When Trading: - Day trading is based less on fundamental research into companies than on identification of a highly volatile stock which means that a stock with many trades and wide price swings in a day, and hope of making a small profit by catching a swing either upward or downward. This takes a temperament that is comfortable with risk and a bank account that can sustain losses. A successful day trader regularly checks a trading formula and doesn't deviates. Panic and wishful thinking are the enemies of a day trader.
Long-term investing is traditionally a research-heavy way to invest. It requires evaluating the financial performance of many organizations, as well as their technical price performance, and opting for the ones that appear to have the best growth ability. A long-term investor purchases and holds a stock for at least an year. He must be confident of the stock's ultimate value to be enabled to tolerate interim periods of both low and high stock prices.
2) Trading Time Commitment: - Day trading is very time-taking. Traders make thousands of trades during a market session any day, and although many use limit-orders and other factors to hit their numbers, they are still bound to the computer during trading times.
Long-term investors spend time researching, but when they purchase their positions, they normally only check their stock once a day or twice and watch for company news. A long-term investor also might add to a position, but micromanaging a long-term investment is important day trading.
3) Level of Risk: - In day trading, investors purchase stock long and sell the stock short. If a stock price moves in the against direction from that anticipated by the trader, it must be sold, or the short position covered. A day trader takes losses as well as benefits during a day's trading. To increase profits on small price movements, a day trader often leverages money by trading on margin. There is quick in-and-out of positions combined with possibility of huge losses using margin. Therefore, day trading is risky for newbies.
A long-term investor usually does not use margin or sell a stock short. The risk of long-term investing lies in failing to make good investment decisions, unexpected deterioration of the company's basics and unexpected market weakness.
4) Brokerage: - In day trading. The trader conducts several transactions during a single day. This can result in higher brokerage or commission costs for the trader. A order may end with some amount of profit or loss, but the trader has to pay brokerage charges along with the applicable taxes to the broker in all cases.
It can be insignificant in long term trading since they hold onto a single asset/position for many years or even decades. The brokerage is usually paid only twice, firstly at the time of buying or creating the position and secondly at the time of selling or exiting the position.
5) Selection of stocks: - Since day traders are more interested in quick returns during a single day, they look out for stocks with higher volatility. In this way, they exploit the price movements to make benefits.
In long-term trading, everybody requires to carefully pick out good stocks that can grow and deliver good returns in the future. Usually, stocks with high growth potential and good management teams are preferred by investors.
6) Analysis: - Day traders evaluate stock movements through technical analysis. Here, the future value of a stock is determined by using charts and historical patterns. The strategies used by the trader or the researcher are based on certain charts and graphs. Based on the final analysis, a day trader decides his strategy for trading.
Long-term investors use fundamental analysis to find out a stock’s intrinsic or real value. They do so by financial metrics, earnings lists, and ratios. The research strategy is totally different in case of long-term investments.
Day trading and long-term investing are two vastly different approaches for creating wealth in the stock market. Everybody requires a different set of skills to excel in these investment strategies. Every individual has a different investment goal and risk appetite. Whether you trade intraday or in long term, it is necessary to know your risk appetite before investing. Many SEBI certified research houses are providing free risk analysis.
You should always pick your trading strategy based on your risk profile and investment goals. Investments are subject to market risks. For someone intraday can be beneficial, but not for everyone. Same goes with long term investments.
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