DAY TRADING VS INVESTMENT

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Adewale Stock

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Apr 15, 2020
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Being a day trader whether professionally or as a hobby is different from being an investor. Although there is no technical distinction between trading and investing but the two terms are apparently used to refer to two very different approaches to making money from investments. An investor is someone who places money on something and looks to profit from that asset growing over time. Whereas, a trader is someone who makes money in the short term by buying and selling stocks frequently. In other words; while one depends on gradual appreciation, the other focuses on market volatility. There are two main areas where trading differs from investing:

1. Timing of trades
2. Analysis of stocks

Time: As widely known, investing is inarguably a long term strategy while trading is more of short term. When you invest in a stock, you are betting that over time the company will grow either by expanding its asset base or its profit. It is understandable that on a daily base, the prices of stocks may fluctuate, but even at that, investors try to buy stocks at that low price and eventually shift their focus to the long-term movement rather than short-term volatility. Trading, on the other hand, is pretty much the fast approach. It entails buying and selling the investments to take advantage of short term price swings.

Analysis of stocks: The analysis of stocks can show a vast difference between traders and investors. To understand this, it will suffice to take cognizance of a stock price and its intrinsic value. The stock price often shows the number of buyers and sellers trading that stock at a given point in time. Beyond that threshold, there’s some intrinsic value; which is a measure of an asset’s true worth. Passive and active investors tend to take note of this information; they ignore fluctuations in stock prices and focus to benefit from the rising intrinsic value even if they buy an undervalued or overvalued stock, whereas traders only care about stock prices. They make no attempt of estimating the intrinsic value and indeed, many traders buy and sell stocks without even knowing what the company does.

Seeing day traders in their flamboyant lifestyles makes trading appear relatively easy but it is a high risk practice in spite of its quick payoffs. Here are some of facts about day trading:

1. Majority of day traders put in copious amount of money behind their individual trades; sometimes they even borrow to leverage their returns.

2. Day trading also requires enormous effort and time, many trades end up yielding only a fraction of a percentage point.

3. Day traders are often forced to vacillate and make decisions on superficial information.

4. Even though some persons make a living out of day trading, it is just deluge with a lot of chance like a game of poker.