The stock market has proven to be a place to increase investor’s wealth to amazing levels. However, there is a common dispute as to which stock market strategy is best. Is it possible to make the best returns with investing for the long term stock market investing or day trading? In this post I will discuss my thoughts.
What’s the difference?
The key difference between these two investing strategies is the time period in which you will aim to hold a stock to sell at a profit. Day traders, like Ross Cameron will aim to make lots of small profits by buying and selling a stock within a day or so. This is great for the more impatient among us, who’d prefer a more active approach in making stock market actions.
On the contrary, Long term stock market investors, like Warren Buffet look for companies they are willing to hold for at least 3-5 years. Typically, the expected gains will be fewer between but much larger. This is typically a safer approach and is a great option if you don’t mind waiting for great returns.
Potential Gains
Due to the nature of lots of quick gains of day trading and the possible use of margin, generally, more money can be made more quickly by successful day traders. But before you jump the gun, there is an important point I need to add about the term ‘successful’ here. Keep reading to learn what I mean. Trust me, it’s important…
Long term investing gains tend to be a little more steady. On average, the stock market increases in value by around 8% a year. With a lot of practice and hard work, you’ll be able to choose the best stocks available to make even better returns. Successful investors have been known to consistently make returns of 12-20% a year. This compounded over time can prove to make a considerable sum of wealth. It just requires some patience.
Risk…
This is an important point.
In the short term the stock market can be volatile and highly unpredictable. This can often make predicting whether the stock price will go up or down each day very difficult. Remember what I said earlier about the word ‘successful’? Well here’s my point…
The truth is, predicting short term trades is hard. More than 70% of day traders lose money and give up shortly after trying. Many traders also use margin. This means taking out debt to leverage each stock purchase to increase upside potential. Although this could bring you faster rewards, the downsides of losing can be catastrophic.
This is why I prefer investing in the stock market for the long term. Long term investing takes over the risk from volatility by holding your shares over the periods of time where stocks are unpredictable. In the short term, stock prices are based upon investors emotions and speculation. In the long run, stocks follow how well the company is actually performing. So great companies will increase in share price regardless of the short time share price occurrences.
The investing style isn’t as active but great gains can be made. Just look at Warren Buffett. He started investing in the stock market from the age of 11 and is now worth over $85 Billion. It takes patience and hard work to look into and analyse each company. But what you put into this game, you will get back out 10 fold. As long as you are willing to be patient.
So I shouldn’t day trade?
By all means, if you prefer the idea of the active approach of buying and selling stocks daily, perhaps day trading may be for you. However, it is more risky and has a much lower success rate. But definitely don’t use margin until you are much more experienced as this is far too much risk for a new investor to bear.
For beginner investors, I would definitely recommend taking the long term investing approach. It will allow you to learn loads about how the stock market works without exposing you to too much risk of losing money. Once you feel more comfortable in the stock market, then maybe it could be an option to start looking at making some short term trades.
However, one last important note. No type of investing is risk free. In the stock market in particular, unforeseen occurrences can happen and you may lose money, even if you invest for the long term. The best thing you can do for yourself is to educate yourself as much you can on your chosen stock market strategy. You can find information on both short term and long term investing in the investing section of the Money Your Concern website.
Thank you for reading. Let me know if you have any questions in the comments section below.
Best of luck with your investing future.
Harry
