Should You Day Trade With Stocks?
Should You Day Trade with Stocks? Academic research shows that the “majority” of day traders lose money! It would be very difficult to earn a living day trading. Because of this many money managers and analysts do not participate in day trading.
What is Day Trading?
Day trading is when an investor purchases and sells their stock in a single trading day. This type of investor employs short-term trading strategies. Day traders normally exit the market before the market closes on the same day. Individuals that day trade sell their shares for a profit within minutes or hours. Day traders must move quickly in order to take advantage of small price moves and are dealing with minor “daily” price fluctuations.
When investors day trade they are, in essence, speculating! Day traders gamble and many are willing to risk thousands of dollars. At times the more they trade…the more money they risk! Day trading is very time-consuming and an investor can sit behind their computer all day long trading stocks! Many of these investors are well educated and give up most of their day studying their trades.
What is the Difference Between a Day Trader and a Long-Term Investor?
Day trading is in sharp contrast to long-term investing! Day traders, unlike long-term investors, buy and sell stocks on the exact same day. Long-term investors know that trading “in and out'” of companies like this can be risky. Plus, with day trading, compound interest, one of the miracles of investing, is not given a chance to grow. Moreover, the fees and taxes an investor incurs by day-trading can quickly eat into their returns.
On the other hand, a long-term investor does not need to monitor their portfolio on a daily basis. As a matter of fact, constant monitoring has little advantage for the long-term investor! It’s actually more advantageous for the investor to only monitor their portfolio “periodically.” The reason being is that price fluctuations in a company’s stock could “tempt” an investor into selling prematurely.
You are not giving your money a chance to “grow” when you day trade. You want your stocks to increase over time! Hence, you need to “fully” ride out your winners. Investing long-term could get you a 4 bagger, for instance. A 4 bagger is a stock investment that increases 4 fold over time! And, stocks can show increases this large if you hold out…and do not “prematurely” sell your winners!
Day Traders Incur Higher Taxes:
There are also taxes to take into consideration when you day trade! You will be taxed at a higher rate than a long-term investor. Any gains will be taxed on a short-term basis (less than a year). This means you will be taxed at your “regular” tax rate and not be able to take the advantageous “lower” long-term capital gains tax rate.
I, personally, am not a fan of day trading and only invest long-term. I find it very beneficial to hold onto a company’s stock, for a bare “minimum” of 3-5 years and preferably longer! Over this length of time, I monitor my company’s fundamentals periodically. I do this, by creating a spreadsheet for each company, to make sure there are no changes in the company’s story that I should be aware of.
In conclusion, an investor definitely does not want to engage in day trading. Day trading is not the best way to invest in stocks! This type of investing can be very risky! In addition, after paying hefty commissions and taxes, there is not enough profit to be made investing in this manner. Moreover, day trading can be very time-consuming! Also, investors, that day trade are not giving their money time to grow! Hence, they are missing out on the miracle of compound interest.
