What should we do, investing or trading?
Before you start in the financial markets you should know what you want to do.
This is a very dynamic world and there are two main sides we will find.
These two sides are: investing for the long-term and short-term trading.
Before you start doing any of those you should learn the differences.
Time scale: trading or investing
What are you looking for when you start in the world of the stock market?
Most certainly you are looking for the easiest way of making money.
What is, in theory, the easiest way to make money in the stock market?
Well, buying and selling the assets as much as possible in such a way that we should increase our “trading cash flow” so to speak.
This is something belonging to the short-term.
These are what I consider trading or day trading, in which case the frequency of buy-sell is quite high.
Hence, it seems that those who are capable of dominating such an activity will be able to make a lot more money than those who do the boring ant typical thing of buying a stock and keep it for many years.
Those who wait many years before selling the asset would be doing what we can call investing.
In the middle of trading and investing we have a wide range of opportunities, from the day trading to years of holding assets.
We can, therefore trade in periods longer than a day, which could be weeks, months, or even a few years.
A very known character of the European markets, Andre Kostolany, author of many books, had his own theory: the speculators would be between the traders and investors and would do trades that lasted from 6 months to 3 or even 5 years.
As we see the time frames we can choose from are quite varied, from seconds to decades.
The period more common in the trading communities is that of day trading.
The more common in the investing communities is that of long-term investing.
Both models have many followers.
However, if you want to do day trading the strategies you have to do will be very different than those you will do for long-term investing.
What should I choose, day trading or long-term investing?
If you follow what the adverts related to the industry say you will end up doing day trading most certainly, at least at the beginning.
If you have more experience you will choose investing almost certainly.
The majority of those who have acquired experience would have done so during their early day trading unsuccessful careers.
Let us see the supposed advantages of day trading:
- Close the trades the same day and therefore you are not forced to have open trades when the market is closed, what gives you tranquillity that you are not going to get caught by a major catastrophe.
- You can limit your losses with a stop loss order.
- You can win in the long and short side of the market
- You can use leverage
- You can use Technical Analysis more efficiently
- You can use automated trading easily
- If you become a professional trader you can make a living trading a couple of hours a day.
The reality of day trading:
- It is true that if the stock market falls before the open you will be fine.
- It is true, but we will have slippage problems.
- True, in theory.
- Well, leverage allows you to win a lot of money but also to lose as easily.
- Here my opinion is contrary to the most of the crowd. It is in the longer time frames where Technical Analysis works best.
- Yes, in theory.
- How many professional day traders do you know?
If many of those points are, in theory true, day trading has a series of problems so big that most of the people who approach it will end up completely broke after a short while, an outcome not much different than with standard betting.
The randomness of the intraday market makes it very complicated that we can have easy profits in those markets.
Let us have a look to the advantages of investing in the long-run:
- The stock market always rises in the long-term
- We do not need to be every day looking at our screens like madmen
- The money is made in the long side of the market primarily.
- It is not recommended to use leverage.
- It is recommended to keep the positions for a long time.
The reality of stock investing
- In theory it is like that, at least in the Anglo-Saxon countries. Another story is for other countries like Russia in 1917.
- True, although the majority of investors still look at the prices every day.
- Investing is basically buying an asset so it can rise in price. Although we can sell stocks short, it is not a much recommended activity.
- Using leverage is not very good idea if we do investing. If we use 4 to 1 we will lose all if the market falls 25%.
- In reality, the majority of those who come to the stock market cannot avoid buying and selling in the worst moments.
If you want to have the illusion that you are going to win money easily and quickly and make a living out of the stock market then you should try trading, but beware because there most of the traders go bankrupt. People say that 95% of traders lose. I tell you that in day trading, the percentage is higher than that.
In any case, it would be better for you if you did trading more relaxed, in periods bigger than a day.
Obviously, you will not be able to make so much money so quickly as with day trading supposedly.
If you are more realistic and notice that trading is a very complicated activity full of scams and sharks, then you may comprehend that it is better for you to invest in the long-term, since doing so you will see how your savings grow little by little as time goes by.
However, even in investing you should have an iron discipline.