there Two main groups of people in the financial industry. On the one hand, there is Long term investors Like Warren Buffett and David Einhorn who believe in buying quality companies and holding them for months or years. On the other hand, there is People who strongly believe in day trading.
Both sides are right Since many people have made a fortune using both strategies. Some, like Warren Buffett, make money buying stocks and holding them for years and decades. At the same time, some, like James Simmons of Rennaisance Technologies, have made a lot of money as traders.
However, the two approaches are not the same, and many people believe that trading short time horizons is riskier. But will this be true?
In this article we will see if day trading is more risky than investing, or is this just a misconception.
A different approach to a different profession
There are differences between investing and day trading. investment is the purchase process and holding financial assets for a long period of time.
In most cases, investors buy stocks that they think are cheap and then hold them for a while. They mostly focus on Fundamental analysiswhich is the process of discovering the intrinsic value of an asset.
On the other hand, trading is the process of buying and selling financial assets with the aim of making a profit. Traders have a very short term horizon.
For example, some of them are known Brokers Trades are usually entered and exited within less than 5 minutes. Their goal is to make small profits several times a day.
Another unique difference is that Day traders are always afraid to leave their trades open overnight. Also, they mostly focus on chart analysis rather than the fundamentals. In many cases, a trader can trade stocks that he is not familiar with.
Related “ Scalping vs day trading
Day trading risks
Day trading is a very profitable approach, but it also has risks that every trader should pay full attention to.
raise the stakes
In most cases, day traders use leverage for day trading. impact It is a situation where people use borrowed money to trade.
The risk is that the trader will incur large losses when the trade or trades move against him. While it is possible to use leverage in investing, Not many investors use high leverage from merchants.
Short selling risk
Day traders buy assets and hope they will go up in price Short assets that they think will go down. There are many risks to short selling because the share price has no limits on how high it can go.
It can rise forever, which means you can make infinite losses. We saw this during the stock meme craze that happened during the pandemic.
Excessive trading risks
There are also risks of over-trading, especially when using a scalping trading strategy. In this, there is a file Possibility that You will lose more money by opening many trades. This is unlike what investors do because they open only a handful of trades a year.
It is better to focus on fewer profitable trades than to open a lot of trades and risk losing control.
volatility
Day trading must deal with volatility several times a day. And we know that it is not easy to navigate the volatility due to the uncertainty in predicting the movement of the stock.
But more volatility means more opportunities to enter/exit a trade and more profit opportunities. For the skilled day trader, this mode is undoubtedly the best for maximizing his profits.
investment risks
Although long-term investing has less stress than the short-term, there are still some risks to keep in mind.
Major macro risks
there Many total risks faced by investors. For example, no matter how good you are, he is It is impossible to predict what central banks will do. And as we’ve seen before, actions by central banks have an impact on stocks.
For example, Stocks and commodities tend to rise when the Fed adopts a dovish tone vice versa. Other macro risks are geopolitical risks such as wars and trade conflicts.
Related ยป How to Master Macroeconomic Analysis
Evaluation challenge
There are several ways to evaluate companies such as DCF and PE multiple comparisons. However, in most cases, Finding the true value of a company can often be difficult.
In the past, we’ve seen many highly valued companies outperform undervalued ones.
Changing feelings
Sometimes, there is a general Changing sentiments in companies. For example, a company like Beyond Meat did as well as investors thought people would turn away from animal meat.
However, the stock subsequently fell amid concerns about the industry.
corporate concerns
Sometimes, there is Concerns about companies that are difficult to predict. For example, as shown below, shares of Adani Enterprises have been doing well for a long time. Then they collapsed when the company was accused of wrongdoing.
Does day trading involve more risk than investing?
in most cases, Experts believe that day trading involves more risks of investment. As we explained above, both sides face many risks. At the same time, Both have their advantages.
For example, by day trading, you can make money in all market conditions. You can buy stocks when their prices go up and short them when the prices go down. tRadar has no buy or short bias.
Another advantage of day trading is that You can ride the news From today well. For example, when a stock is up during the day, you can take advantage of these market movements.
There are other benefits of day trading, including many strategies available such as copy trading and algorithmic trading.
Also, day trading allows people to do that They change their strategies quickly when conditions change. For example, if the market moves from trending to range bound, you should be able to adjust quite well.
Is day trading riskier in the long run?
There is no correct answer on this question. If you ask someone like Warren Buffett who has a long history of buying and holding stocks well, he would claim to be a long-term investor. On the other hand, if you ask any of the top day traders, they will make an argument for focusing on short-term moves.
So, this situation Depends on where you are as a person and your preferences. It is possible to make good money as an investor and trader.
With our experience at DTTW, we believe day trading is more profitable because that’s what we do. We help traders from all over the world to set up their trading desks.
summary
In this article, we have looked at some of the differences between day trading and investing. We have established that day trading is the process of buying and selling financial assets short for short-term profits. On the other hand, investing involves buying assets and holding them for a long time.
It is difficult to say what is risky between investing and trading as it depends on personal preference.