Investing and daytrading are two terms that we hear all the time.

Investing, for most people, brings up the mental picture of a wise intelligent person putting his money in stocks and bonds for retirement.

 

 

 

 

Daytrading conjures up an image of a young, fast moving, eclectic type person scalping profits out of the stock market throughout the day. There are many misconceptions about both investing and daytrading.

 

 

First of all, let's talk about the similarities of the two. Investing generally refers to buying and holding stocks for months to years. Daytrading is also investing, but stocks are purchased and held for anywhere from a few seconds to days, rather than months or years. Investing is defined as: laying out money or capital in an enterprise with the expectation of profit. This definition also describes daytrading. So, we have long term investing and short term investing. The main difference between the two is time.

Let's talk about advantages and disadvantages of each. The main advantage of long term investing is that history has shown that the stock market index has increased at a much faster pace than interest in a savings account from a bank. So, theoretically, buying a stock and holding it over a long period of time will produce a return on capital that is greater than other forms of very low risk investment.

For a long term investment example, suppose you purchased 500 shares of AT&T @ $50 per share as a long term investment at a total cost of $25,000. You figure that after 3 years it will be worth $50,000. This long term investment will tie up your money for 3 long years. You will not be able to use the $25,000 because you now have stock certificates instead.

At the end of 3 years the following conditions might exist:
1.) As expected, you doubled your money and sell for a profit.
2.) AT&T hit some bad times and the price is around the same level as the purchase price. After 3 years there is no profit, but you still have your $25,000.
3.) The market as a whole has declined and taken AT&T down with it to around $30 per share. After 3 years you are down <$10,000>.

The bottom line is that there is risk that you might lose your money, but it will take you 3 years to do it.

Let's take a look at the major benefits of short term investing, or daytrading. First, lets' make it clear that when daytrading, you could buy a stock in the pre-open before the morning bell and sell it in the afternoon or you could buy it at 10:00 am and sell it at 10:05 am or you could buy it on Monday and sell it on the next Friday. Because holding a stock (position) over night carries greater risk, we promote buying and selling within the same day.

Suppose you have $25,000 for short term investing. You buy 500 shares of AT&T in the morning at $50/share. You will sell it sometime later the same day depending upon market conditions. You selected this stock because two months ago it was at $60/share and has sold off along with the Dow Jones Index and now both are showing a morning star reversal pattern. Here are some possibilities.
1.) The price rises 1.5 points, so you sell it for a profit of $750. Your $25,000 capital is available to you and receives interest even for the day of use.
2.) The prices goes against you and triggers your stop at $49 3/4 causing you a loss of $125.
3.) Positive news comes out during the day and AT&T is up 2 points at the end of the day. You could sell for a profit of $1000. The stock and index are closing on their highs. You decide based upon all you indicators that tomorrow will be a positive day, so you hold your position overnight. Tomorrow the process begins again with a trailing stop and the odds in your favor for another profitable day. Selling is an easy decision because you set the trailing stop and let it do the selling for you.

Long term investing ties up your money, can yield a large profit, or can create a large loss.
Daytrading gives you Leverage, allowing you to invest the same money over and over again. When no positions are carried overnight your money is swept into a money market account earning interest even for the day you traded with it! Losses can be cut short and profitable trades can run.

Education is the key to success in any endeavor.