Should you day trade or invest? The answer is… they are not the same. The general consensus is that you should not day trade, you should just invest, buy and hold, and collect that annual return of 7 to 9 % instead. And I know that this statement isn’t completely wrong. It stems from the fact that most day traders lose money and cannot even beat the market. Also day trading is more stressful, it involves a lot more work, versus if you had just bought and held for the long term capital gains and dividends.
Day Trading cannot be compared to Investing. We’re going to dive deep into the differences, the similarities, the percentage of profits from either day trading or investing today. Let’s lay out the facts on day trading and investing right now. Day trading is the act of buying and selling stocks in a single day, hence taking advantage of the stock’s intraday price fluctuations, or price action. The stock could be moving up and down due to fundamental news, earnings, FDA trials, or global political news.
Investing is the process of committing money to buy assets in the expectation of future appreciation of value, with the goal of generating income or selling for a profit. For example, this could be buying apple stocks in your portfolio today at Rs. 400 thinking that it could become Rs. 800 in 3 years or more. Or buying a home in a up and coming neighborhood thinking that the housing market in the area will increase 20% or 50% in a few years. Or hitting that like button to investing in this channel thinking it will make it rain lamborghinis in the future.
Now lets talk about the Key differences of what makes day trading and investing different. The obvious difference here is the holding period of stocks. Day trading you are closing your position within a single day. Sometimes in hours, minutes, or even seconds. Yes seconds. But buy the end of the day, the entire account is all cash. Meaning you have no positions left long or short. Whereas when you’re investing in the stock, you are most likely holding the positon long for months, years, and some decades.
The second key Difference is the way you see the stocks or assets you’re holding. If you’re investing in a stock, it’s most likely because you see the value in the business, or the sector. You could be investing in Tesla stock because you see the long term potential of electric vehicles. Maybe you think that in the future more cities and countries will move towards gasoline free modes of transportation. And policies will favor these vehicles that are more environmentally friendly. Therefore you think valuations of stocks like HCL or Infosys, which are both IT Sector companies will rise. You see the big picture, you think the industry value will double or quadibpel in years or decades.
Now as for day trading, i hate to break it to you. 80% of the time, I have no clue what the company does. Does the company make money? What sector is it in? Whats the book ratio? Will it go up 20% in a few years? All i care, as a day trader, is whether it can go it go higher 20%, today. Or can it move 2% to 5% within a single day. Remember we are talking about closing all the positions by the end of the trading day at 3pm. Essentially in day trading you are treating the stocks we buy and sell as trading vehicles that are moving, not because of its potential appreciation in value. We buy the stock because its moving up in an uptrend, or breaking out, squeezing to the moon. Or we are shorting the stock because we know its a worthless piece of trash, its only being pumped up by stock manipulators with some news so they can do an offering at the high of the day and dump on unsuspecting shareholder who end up bagholding these turds. And also like you just heard, in day trading you have these more exciting languages too that i just used.
Whereas in investing, what can say about this TCS stock. Very important though I’m definitely not saying fundamentals only matter in investing, and only technicals matter in day trading. What i’m saying is that in day trading we need to know the fundamentals that matter short term, premarket or sometimes the moment the news is announced. We don’t care what the fundamentals do for the valuation in 2 or 3 years, But its more important we understand how fundamental will move the stock price technically, today. In trading you dont need to be smart, but you need to be observant and have a sharp response to piecing together information really quickly.
The third difference between day trading and investing, and also the reason why day trading could generate so much more % return in the short term (if done right), is the term leverage. When investing in real estate, you have the benefits of using borrowed money from the bank to purchase a home. Let’s say you are qualified to buy a $1mil home. if you put down 30% downpayment of 300k, and the bank lends you the rremianing 70%. You could do the same when investing in stocks too. you could leverage up to 100% from the broker. So if you have 5K in your investment portfolio, you could get up to 100K worth of buying power to purchase stocks. But keep in mind margin investing has lot of risks and its generally not recommended. But in day trading, leveraging your capital is extremely beneficial. You could get up to 3:1, 4:1, or sometimes even 6:1 buying power intraday. So with the same 5k, could get 15K to 20K buying power.
While we’re on the topic of leverage for both day trading and investing, its important to discuss the risk associated with it. It’s important to not over leverage, whether we’re talking real restate investing or day trading. When used properly in, margin buying power allows traders to get more upside return using less capital. And thats how traders can build their accounts quickly. Its not uncommon to see good traders grow their account 50, 100, or 300% in a month. But at the same time, that also means day trading on margin has a lot more downside.
Speaking on the topic of risk, this brings us to the 4th key difference between day trading and investing. Warning, day trading is inherently a riskier practice than investing, It’s not uncommon to hear about beginner traders lose 50% or 100% of their account in 2 or 3 months. Or if you are shorting selling on margin, you could blow up when a low float stock runs 200-300% against you to the upside. If you’re not willing to learn first by paper trading for a couple of months first, and if you’re not going to put in the work outside of market hours to learn steps and backtest your strategies, if you’re just going to follow some chat room alerts to buy at the high of the day breakout and treat this like gambling, do not day trade.
Now the number 5 key difference, and this is perhaps the distinguishing factor between day trading and investing. Is that day trading, is a business. It’s essentially a career and just like your normal 9-5 job. If you’re investing, you can just look at the market once or month, or like I do.. Once every six months to get a sense of what my investment portfolios are doing. Investing is meant to be for a long term in 10 years or more, and for retirement for most people. I have my active career income which is day trading. And I take out profits from there and have it deposited automatically into my investments monthly.
Day trading is a business, it requires a lot of hard work, upfront capital, months and years of studying, observing price action and market tuition. For people who don’t want a second job and just want a slow, stress free approach to profit from the stock market, and collect that 5-7% annualized return, just invest in safe blue chip stocks like or index funds for 10 years or more, do not day trade. It’s extremely important to understand that you cannot treat day trading as investing. Because if you do, you can actually lose a lot of money. The most common practice in investing in the stock market is to buy and hold. But definitely cannot do that in day trading.If you buy and hold, that could easily turn into hold and hope, or bagholding.