These Tips Can Help Pave the Way to Investing Success
If you’re hoping to master the markets, you’ll need to begin with the basics. Knowing the difference between trading vs. investing is a great place to start on your journey to investing success. They share similarities: both day trading and investing are forms of securities trading. However, they each have their own advantages and challenges depending on your strategy, financial situation, and starting point.
At Davidson Capital Management, we encourage our clients to take the long view and focus on investing over trading. However, investor education is paramount, and we think it’s important to provide you with information on trading vs. investing so you can draw your own conclusions. Read on to find out what you need to know about each method and determine which one might help you reach your goals.
Day Trading vs. Investing
Here’s a high-level breakdown of the main differences between trading vs. investing:
- Day Trading: Buy a stock in order to sell it at a specific price over a shorter time horizon
- Investing: Buy a stock in order to participate in the successful growth of a company over a longer time horizon
- Day Trading: Sell a stock to cash in on short term price appreciation
- Investing: Sell a stock to generate a long-term capital gain
- Day Trading: One day
- Investing: More than a year
- Day Trading: $25,000 minimum for stocks, but none for futures or Forex
- Investing: Anywhere from hundreds of thousands of dollars to a few hundred or less
- 5% Rule: No more than 5% of your investable net worth should be invested in a single stock in either investing strategy
Costs and Fees:
- Day Trading: Dependent on the number of shares and/or dollar amount of transactions. The custodian you trade through is another determining factor
- Investing: Dependent on capital gains, investment management fees, and/or the expenses of investments such as mutual funds or exchange-traded funds (ETFs)
SEE ALSO: Five Qualities of a Good Investor
Day Trading in Depth
Even though it’s called day trading, buying and selling can happen in a much shorter amount of time, like minutes or even seconds. It all depends on the market price of the stock you’re trading. If the price changes and there’s profit to be made, the trader can initiate a transaction in short order. The reason it’s called day trading is because all sales and purchases are opened and closed on the same day.
Day trading can happen with the help of a stockbroker, who makes day trade stock transactions on your behalf or an investor can trade themselves through numerous online custodians/brokers. In order to be ready to make your moves, you’ll need to maintain a margin, that is, an account balance your broker can use. How much needs to be in the account is dictated by the U.S. Securities and Exchange Commission—those who trade more than four times in five days must always keep a minimum of $25,000 in their accounts.
There are some exceptions to that, depending on which stocks and markets you want to participate in. If you want to day trade in the currency markets, for instance, you don’t have to meet any minimum account amounts, though you may want to just to be on the safe side.
If you want to maximize your money, it pays to be mindful of fees, which can take a chunk out of any profits you make. Brokers often charge a brokerage fee to execute your transactions or provide other services. Though fees vary, they can either be a flat fee, a percentage of the transaction, or a combination of both approaches.
Even if a fee seems reasonable, it’s a good idea to play it out to see how it could impact your profits. Say a broker charges a commission of $5 per trade. That means a 5% fee would be deducted if you trade $100 in stock. And don’t forget that the fee goes both ways—if you buy it with the intent to sell, you’ll incur a $10 fee on that one stock, which means you’ll need a 10% return just to stay in the black on that deal.
Like any trade or investment, at the end of the day, it’s all about risk/reward. On a good day of day trading, a high-end prediction of gains could be upward of 3%. It may not sound like a lot, but it could mean big profits at the end of the month because gains compound quickly. However, the same goes for a potential decline, so trader beware.
Investing In Depth
Now that you know about day trading, here’s the deal with investing. Investing, put simply, is the buying or selling of an asset with the intent to hold onto it well into the future—months, years, or even decades. This strategy is all about the long term. Investors hold onto their securities and wait for the exact right time to sell for the biggest profit in the future.
This kind of long-term investment is ideal for the stock market, and there are thousands of stocks to choose from, in addition to exchange-traded funds (ETFs). Where you start is up to you when choosing stocks or stock funds. Often, people want to jump right into buying individual stocks, but the most sought-after stocks can come with a significant price tag. As of today, Berkshire Hathaway has the highest-priced shares of any American company. Just one class A share will cost you over $400,000.
Of course, not all stocks are priced so high. One of the most accessible and diversified ways to get into the stock market is to invest in exchange-traded funds (ETFs) or no-load mutual funds.
Just like day trading, fees and expenses can add up quickly. The fastest way to add money to your investment portfolio is to keep your fees and expenses as low as possible. But there is one distinction between trading vs. investing: you have a much longer time to turn a profit than you would with a day trade.
Some investment strategies can result in lower fees and taxes, like ETFs or no-load mutual funds that track stock and bond indexes. One of the most well-known stock indexes—the Standard & Poor’s 500 (S&P 500)—provides you the opportunity to diversify your assets across 500 stocks. Funds that track this index, or other indexes, can lower your fees and taxes because they generally have lower asset turnover.
The most common fees are investment management fees, sales loads, account fees, transaction fees, and redemption fees. That said, many organizations charge a combination of fees so it’s critical to ask the questions what fees your portfolio will be accessed on a daily, quarterly, and/or annual basis. If you feel you’re not receiving a clear answer you may want to consider working with another firm.
Another tip to decrease fees: try to buy stocks in larger amounts, rather than making many small purchases. It’s a good rule to save up at least $1,000 before making your investments so commissions and fees don’t eat up your possible profits. Depending upon the size of your investment portfolio many discount brokerage firms like Charles Schwab or Fidelity do not charge sales commissions.
Investing is inherently less volatile than day trading, and long-term investing is more than likely to turn a profit over a long time horizon. The biggest risk is a lengthy downturn, and whether you’re able to hold onto your stocks long enough to see the other side. Of course, it’s not a given that profit will be made—some stocks may never be good investments, no matter how long you hold onto them. Therefore, continuous dedicated research and analysis is required for any type of investing.
Trading vs. Investing: Which One Is Right for You?
Whether you choose day trading or long-term investing like we recommend at Davidson Capital Management, how well you do ultimately comes down to how well you can make it fit into your life.
Day trading requires at least two hours a day, and potentially more if you’re trading more frequently or balancing U.S. and global markets. Long-term investing, on the other hand, can be done in your downtime. You certainly can spend more time if you’re looking for opportunities, but many investors can take a back seat once they get their investments up and running.
But with all that said, any type of investing requires a dedicated amount of time, research, and analysis. For most investors, they do not want to spend their time worrying about the daily ups and downs of Wall Street. Nor do they want to bear the burden of self-managing their investment portfolio.
It’s important to understand the different types of investment professionals you can work with to assist you in reaching your investment goals. If you’d like to learn about Davidson Capital Management’s investment management offerings, or you need a San Antonio Registered Investment Advisor (RIA), give us a call today. We can answer any questions you may have about trading vs. investing, and we offer transparent, in-house investment management based on your best interests.