Day trading and investing for the long term are both viable forms of securities trading. Many differences make each method unique and worth doing—many day traders choose to do both.
Learn what each investing method is and what you'll need to consider if you're choosing between them or thinking of trying both.
Day Trading vs. Investing
Day trading is buying or selling an investment over short periods, such as seconds or minutes. If the market price of a stock changes, and a trader can profit, they make the transaction. When day trading, all positions (purchase or sale) are opened and closed within the same day.
On the other hand, long-term investing consists of buying or selling an investment and holding it for months or years. Investors hold their securities and gain profit from selling them when the market price changes to their advantage, or they may even hold for decades.
The decision-making process for a day trade can be quite different from a long-term investment—there are different skills and personality traits required for each method. The key difference between the two is that day-trading needs more attention throughout the day, where investing requires less monitoring and plenty of long-term patience.Day trading and long-term investing also differ in terms of capital requirements (i.e., how much money you need), time commitments, and potential returns. If you are starting in the markets and trying to decide where to focus your efforts first, consider the following five areas that can help you make a decision:
- Capital required
- The costs you can afford
- How much time you have
- Your personality
- Your ideal rate of return and risk tolerance
Capital: How Much Do You Need?
Money, or capital, is the number one requirement for investing and trading. There is no set amount required to begin trading or investing; however, several factors are based on the method you choose, telling you how much you might need.
The biggest factors to consider are laws that regulate the amount of capital you need to have.
Trading
There is no legal minimum capital requirement to day trade in the currency markets, but it's best to start with $1,000. If you want to day-trade futures, it helps to start somewhere between $5,000 and $7,500.
Investing
Starting capital varies when choosing stocks or stock funds. Mutual funds are lower-cost bundles of pieces of different stocks that you can buy. Buying an individual stock from a corporation or broker can be very costly—one class B share of Berkshire Hathaway Inc. costs over over $5,700 as of May 2021, for example, while a single class A share costs more than $350,000.23
What Are the Costs of Trading vs. Investing?
Many traders and investors look for low fees when they are trading. Fees vary in amount—sometimes they're set, sometimes they're a percentage. Recently, some large brokers have eliminated fees to attract more traders.
Fees can begin to add up if you're making multiple trading transactions throughout a day. Actively managed funds charge higher fees than passively managed funds. Here are some examples.
Trading
Assume that your broker charges a commission of $7 per trade. If you're buying a $100 worth of stock, the commission would be a hefty 7% fee deducted from any profit you might make.
If you buy this stock with the intent to sell it, you'll rack up a $14 fee for the buy and sell trades. This means you'll need to have a 14% return to break even on a $100 stock trade—a lofty goal indeed.
If you were to buy $1,000 of stock, the $7 fee would be only 0.7% of your capital. The $1,000 stock then only needs a 1.4% return to cover the transaction fees. The commission charge stayed the same, but the fee is much more as a percentage of a small investment.
Investing
One of the least expensive ways to invest in the stock market is through mutual funds or exchange-traded funds. Funds allow you to buy portions of a bunch of stocks you might not be able to afford. However, fees can add up quickly with funds as well.
Many mutual funds and ETFs track indexes, such as the Standard & Poor's 500 (S&P 500). The S&P 500 is a list of 500 of the best-performing stocks and is managed by S&P Global.
Mutual funds generally include these fees:
- Sales loads
- Redemption Fees
- Exchange fees
- Account fees
- Purchase fees
Some ETFs might cost less to maintain than mutual funds, and others more. For example, the iShares Core S&P 500 ETF (IVV) has .03% (of your total investment) management fees and no service or other expense fees. While low, the ETF had a turnover rate of 4%, which could trigger taxes on capital gains.
In contrast, the Fidelity 500 Index Fund has annual operating expenses of .015% of your total investment. However, there is a 7% turnover rate within the fund, which might increase your taxes as the managers sell stocks and create capital gains.
How Much Time Do You Need?
Time varies, depending on what you're trying to accomplish. For the most part, day trading takes some active time every day, while investing takes some active time throughout the month.
Trading
Day trading requires a daily commitment, typically of at least two hours. The first hour that U.S. markets are officially open for trading generally is one of the best times to capitalize on large price moves. As lunchtime approaches in New York, stock activity tends to quiet down.
Your total time commitment should be about 15 hours per week on the low end and up to 40 hours per week on the high end (if you're trading most of the day). In the U.S. market, the most active time for stocks, currencies, and futures is near the market's opening time each morning. Alternatively, global markets also tend to be active (especially currencies and European stocks) near the European open.
Investing
Investing for the long term and the research that goes into it can be done at any time, even if you work many hours at an office job. When you're ready to purchase stocks, expect to spend a couple of hours per month looking to find ones that follow your strategy. Finding or creating an investment strategy will take up more time in the beginning.
Some people choose to be more active, spending a couple of hours per week doing research (especially if they have lots of capital and are looking for multiple trading opportunities).
Trading vs. Investing Personalities
Day trading and investing both take emotional discipline to be successful. They also both require patience, but each requires a different sort.
Investors and traders need to be able to understand the complicated relationships between the markets and investors. If you're considering either, you'll need to be able to use the tools of each—technical indicators and financial analysis, which takes dedication to learning.
Trading
Day traders are active, potentially taking many trades a day, although they still need to wait for their buy and sell trade triggers to occur. Trades must be opened and exited according to specific trade triggers provided by your predetermined (and preferably back-tested) strategy without emotions.
Investing
Long-term investors need to be patient and know that their investment is a good one. They don't monitor prices and positions throughout the day or worry about every penny of fluctuation.
Risk vs. Return
Trading
You might be able to make 0.5% to 3% (on the high end) per day. That may not sound like much, but it could equate to 10% to 60% per profit month.
Higher return percentages may be possible on smaller accounts, but as the account size grows, returns are more likely to shift down to less than 10% per month.
With day trading, gains compound quickly. For example, if you start with $30,000 and make 10% per month, you'll have $33,000 to begin the next month with. If you make 10% again, now you have $36,300 to invest. If you make 10% per month for a year, you'll end up with close to $95,000.
Which Is Best For You?
The answer lies in how much capital you have, how much time you can or want to invest, and how much risk you're willing to take on. Once you determine those factors, you can decide whether to trade, invest or do both.
Then, develop a strategy for purchasing and selling, and stick to it. Whichever method you choose, one good rule of thumb is never to risk more than you can afford to lose.
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