When it comes to making money on the stock market, traders and investors are two completely different species. Both traders and investors adopt a different approach to generate profits or create wealth in the stock market. Here are some critical differences between day-traders and long-term investors.
Holding Period
Day-traders buy and sell stocks the same day during the working hours of the stock exchanges. Traders hold stocks for a brief period. Whereas long-term investors buy and hold stocks for long terms. The holding period of shares can range from months to years to even decades. Short-term market fluctuations do not affect the investment decision of long-term investors.
Capital Growth
Traders make money by buying stocks at a lower price and selling them at a higher price. Traders time the market to make their trades. Whereas long-term investors create wealth by earning dividends and compounding interest by holding stocks for an extended period.
Risk
Trading and Investing in shares involves market risks. Nonetheless, the degree of risk varies for day-traders and long-term investors. Day-traders are exposed to short-term market fluctuations while the long-term investor is not affected by short-term market fluctuations. However, day-traders can earn substantial profits in a short amount of time, whereas long-term investors need to wait for longer durations to reap their gains.
Art Vs. Skill
While day-trading is like playing T-20 Cricket and long-term investment is like playing a 5-day Test match. Just like in T-20 Cricket, a batsman requires the ability to score at a fast rate, day-traders need the skills to time the market and learn prevailing market trends. On the other hand, a long-term investor requires patience and stay put like a batsman in Test Cricket. Investing involves the art of understanding business fundamentals and the patience and commitment to remain invested in the long-term.
Strategy to Make Gains
Day-traders buy shares for a short period. Traders buy and sell shares the minute the price of shares increases in the stock market. Timing is vital in trading, and missing the right window might lead to losses. Day-trading involves looking at the current performance of companies to book profits in a short duration of time. Whereas long-term investors ignore short-term market fluctuations and trends and hold on to their investment for an extended period to earn a profit.
Both day-traders and long-term investors who achieve their financial goals can be referred to as successful. Day-trading and long-term investment have their pros and cons, and you can choose whether to become a day-trader or a long-term investor based on your financial goals.
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