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Working the Market Long Term vs. Day Trading

Working the Market Long-Term vs. Day Trading

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The old adage “time is money” takes on a whole new meaning in the stock market. For day traders and long-term investors, it means two completely different investing strategies.

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The old adage “time is money” takes on a whole new meaning in the stock market. For day traders and long-term investors, it means two completely different investing strategies. It’s important to know the difference so you can determine your own strategy when you’re ready to start investing.
Long-Term Investor
Profile. Any investor who seeks long-term appreciation in value. What defines long-term varies by investment strategy, but several years is usually the minimum.
Strategy. Long-term investors spend significant time researching and analyzing before purchasing securities. Once purchased, these investors tend to disregard short-term price fluctuations and maintain a long-term perspective. Investors can have a passive or active approach: a buy-and-hold strategy is passive while managing a portfolio is active.
Theory. Long-term investors look for investments that will gain value over at least three to five years, allowing time to smooth out market swings.
Time. Each investor spends a different amount of time on investment activities, based on their individual objectives. Usually a large chunk of time is spent analyzing investments before purchasing, followed by monthly or annual portfolio check-ins.
Education. Professional investors need a bachelor’s degree and potentially a license. Novice investors are not required to have formal training.
Trade/Investment Vehicles. Long-term investors often buy into stocks and mutual funds. Bonds can also be a long-term investment vehicle, but must yield a rate of return higher than the rate of inflation to be worthwhile.
Risk. Although every investment carries some risk, historically, a long-term investment strategy has yielded successful results. Long-term value investing is Warren Buffett’s style. Need we say more?
Principal Investment. Minimum opening deposits for a brokerage account range from $100-$5,000. Deposits can sometimes be avoided for certain account types if you sign up for monthly electronic transfers from your personal account to your brokerage account.
Day Trader
Profile. A professional investor who searches for small price movements and quick profit opportunities; aims to buy and sell shares on the same day, or during a single market trading session; uses risk capital that he or she can afford to lose.
Theory. Day traders try to time the market in the short-term — a theory called market timing. They are highly attuned to the market and can recognize price patterns, market movements and the potential impact of financial news. For instance, if company XYZ announces a breakthrough medical treatment, there is a small window in which the company’s share price may be undervalued. Day traders must be able to recognize these opportunities and move quickly before prices adjust.
Strategy. Day traders capitalize on short-term price movements of stocks through arbitrage and swing trading. They also analyze market news (e.g. upcoming mergers or acquisitions, etc.) to find value trades.
Time. It is a huge time commitment to stay in tune to the markets and current events, so many day traders work full-time.
Education. Although it is possible to work independently, the majority of day traders are employed by large financial institutions, in which case a bachelor’s degree in business, finance or accounting is required. Professional licenses offered through the Financial Industry Regulatory Authority (FINRA) may also be necessary.
Investment Tools. Institutional day traders are provided certain luxuries like access to the dealing desk of a financial institution (which ensures instant trade execution), advanced analytical software, and vast disposable capital. Independent traders must use their own resources and risk their own capital or capital they manage for others.
Trade/Investment Vehicles. Day traders seek highly liquid assets, such as currency and stocks.
Risk. Since day traders don’t have time to buffer market swings, the risk of potential loss is high. To increase profits, day traders often trade on margin (borrowed money), but if the market tanks, traders could be stuck with hefty losses and large debts. Do not believe the get-rich-quick scams associated with day trading. Independent investors looking to day trade should have professional knowledge and disposable money.
Principal Investment. Investors who execute four or more day trades exceeding 6 percent of their total trading activity within a five-day period are considered pattern day traders and need a minimum of $25,000 in their margin accounts. This provides a safety net for brokerage firms that hold these accounts.
Investment vehicles vary in potential earnings. Stocks, for example, typically yield 8 percent to 20 percent annually (not so much in recent years). The higher the potential yield, the greater the risk. Whether you have a day or a decade, deciding between investment strategies relies on the amount of risk and time you’re willing to take.

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