Day Trading Vs Long-Term Investing – Pros and Cons

Day trading is a very volatile form of investing, but if you have the skills, knowledge and risk tolerance to do it, you can make a lot of money.

Long-term investments are assets owned for longer than a year, such as stocks and our friend the bond. Because of that long-shelf life, investments with a term of at least 12 months are almost required for investors working towards longer-term financial goals like long-term savings for retirement.

Less Risk

One difference between day trading and long-term investing is risk. There is risk in both types of speculation in financial markets but day trading tends to be riskier than investing. While day trading involves investors buying and selling securities throughout the day with the hope to make a few cents on each transaction to make up for the losses, it likewise exposes investors to huge losses in a short period of time, not to mention the potential for quick and large gains. Day-trading also involves high costs in taxes and fees. Any realised profits are taxed at ordinary income tax rates, which are far higher than the capital gains rates charged on investments held for more than a year. Investing typically incurs lower transaction costs and portfolio turnover levels than day trading, and also provides tax-efficient opportunities such as capital loss harvesting.

Quick Profits

The allure of making money too swiftly for too many keeps people . . . Day trading is a dangerous activity – dumb if you haven’t got the time and don’t enjoy the pain.

Photo by Dean Drobot/Shutterstock.comPatience when it comes to losses over an extended period, and decisiveness when the momentum changes in order to take advantage of the opportunities as they present themselves and to cash out on their benefits.

Then there’s consideration of leveraged products, which amplify profits and losses by multiplying your investment by several times, and the fact that short-term capital gains (taxed at year’s end), are taxed differently than their long-term counterparts – which means that your pocket may not be as lined, depending on your tax bracket, when it comes to that big winning day trade.

Less Time

Day trading, the seemingly popular, almost sexy way to make money according to the flurry of blogs and tweets on social media, is awfully tempting at first glance; it’s so easy, right? Yes, it is easy to lose your money this way! But making money in this manner is much harder than it seems. As you might expect, brokers and those working in finance eschew the technique thanks to transaction costs: just because you buy and sell stocks daily doesn’t mean that those involved in the process don’t appreciate you and all the other day traders – fees and taxes typically wind up wiping out any additional bonuses afforded to shorter-term gains, not to mention sitting atop those already applicable to capital gains tax rates for investments held for more than 12 months. Because day traders must have large sums of money at the ready to take advantage of the minor intraday fluctuations that occur every day, ‘play money’ is required, not capital. In other words, if you decide to give day trading a whirl, use only the money you can afford to divert from its original purpose, and talk to a financial advisor about ways to hedge against loss if your efforts don’t work and how to reduce capital gains taxes if your efforts do.

Less Money

While social media often raves about people making millions out of day trading, having a record of consistent profits as a day trader is actually the exception to the rule. Speculating with your entire investment pot is risky investing. Short-term day trading involves large amounts of capital and margin (where you put up a certain amount of cash per short‑term transaction); a long-term investment might start with smaller amounts that grow over time from consistent contributions to your portfolio. A brokerage account, for instance, lets you delay execution of frequently scheduled trades that would incur transaction costs, and also enables tax planning, through the use of wash sales or harvesting of losses. Retirement accounts such as an individual retirement account (IRA) or 401(k) slash taxable income – cash kept in such accounts as a percentage of your paycheck won’t be taxed until you take it out in a few decades from now – while for investors who keep their stocks for at least a year, capital gains tax rates are also reduced.