Day Trading vs Investing - What's the Difference?

Making money is the intended goal of both day trading and investing, yet their approaches (and often the outcomes) are very different.

As with all investing choices, it is generally a good idea to educate yourself and strive to make informed decisions based on your own circumstances and goals.

Day Trading: Short-term, Trend-based, and Risky

Day trading involves the buying and selling of stocks, typically in a short time frame of days, hours or even minutes, to turn a quick profit by taking advantage of short-term price fluctuations.

Tales of wild day trading successes tend to capture our attention and sound appealing, but the reality is that most day traders eventually suffer from catastrophic losses or middling returns for the effort expended.  

At the extreme day traders are gambling that current trends will continue. Losses are constant, and big wins are the exception.

Day trading is a form of short-term speculation, and that requires an acute ability to forecast and follow upward and downward trends betting that they will continue long enough to profit.

Timing is critical, and you have to be prepared to make moves quickly.  Even with all of these variables at play, luck often determines outcomes, and this is an unsettling driver of financial decisions.

Day Trading Failure Rate Is High 

Most individuals do not find success in day-trading ventures in the long-term, and many learn the hard way that day-trading risks far outweigh rewards. 

Yes, at times the payoff can be worthwhile, but it is rarely lasting.  Day traders are always just one or a few trades away from ruin.  

The roller coaster approach of day trading can be exciting but it is a risky option especially when your financial savings are on the line.

Day Trading, in a nutshell, is:

  •  Financially risky. Faster gains, but also sudden unexpected losses.
  • Largely dependent on timing.  You must have the ability to monitor prices and act rapidly.
  • Complicated as far as taxes go.  Difficult to track large number of trades.
  • Transaction costs and taxes for trades can quickly add up.
  • Very dependent on trends.  A serious time commitment is necessary.
  • Stressful and demanding both physically and mentally

Investing: Long-view and Reliable Gains

If you want to make your hard-earned money work for you, long-term investing is the tried and true method for successful and reliable returns and long-term wealth.  

There is a reason why most individuals choose investing to build substantial wealth over the course of a lifetime: it works. Slow and steady wins the race.

There are many rich long-term investors and very few wealthy traders (unless they are market makers or arbitrageurs working on a big scale).

Investing Is A More Predictable Path to Success

If day trading is a roller coaster ride, investing is a steady climb to freedom. With the latter, you are much more likely to end up at a beautiful sunset with the financial freedom to look back on a long but worthwhile journey.

There will be temporary peaks and valleys to weather, but the overall trajectory will be upward due to reinvesting and compounding.  

When retirement and financial freedom is at stake, this approach is a lot smarter and far more reliable.

With investing, the day-to-day performance of an investment is much less important than its ability to deliver consistent income and growth over a longer period of time.

A Good Advisor Helps Manage Risks

Investing does, of course, carry risks too, but a long-term approach enables investors to ride-out downturns, and with time, the market recovers from every dislocation.  

A seasoned advisor can help you to weather the ups and downs while keeping your focus on the long-term goal of building lasting prosperity.

Warren Buffett, considered to be among the most successful investors of all time, advocates for exactly this type of investing: value-driven investments based on holistic assessments of companies and their people. 

Buying stocks in companies based on their potential and the quality of the goods/ services offered, and then holding them as they realize this potential, is the key.

Long Term Investing offers:

  • A long-term patient approach with a higher degree of compounding over time
  • Lower turnover leads to less taxes and transaction expenses incurred
  • A less risky approach to making money. The long-term approach allows time for market downturns to pass.

What Role Does Expert Guidance Play in Smart Investing?

A seasoned investment advisor will work with you for the duration, making adjustments as needed to respond to market opportunities or changing variables in your own life.

This client/ advisor relationship is the bedrock of smart investing.

Ridgewood Investments, as fiduciaries, are driven to advise our clients to take smart decisions for the long-term, which is an extremely important factor to consider.

We are a fee-only advisor firm so we never work for commissions.

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