Day trading and investing are both viable forms of securities trading. However, many differences make each method unique and worth doing—often, people choose to do both.
Learn what each method is and what you'll need to consider if you're choosing between them or thinking of trying both.
What's the Difference Between Day Trading and Investing?
|Buying||Buy a stock with the intent to sell it at a specific price||Buy a stock with the intent to hold it and gain value|
|Selling||Sell a stock with the intent to buy it back at a specific price||Sell a stock after a long period for a gain|
|Time Horizon||One trading day||More than one year|
|Capital Required||$25,000 minimum for stocks, none for Forex and futures||Varies from a few hundred to hundreds of thousands of dollars|
|Costs||Based on the number and size of the transactions||Based on management fees and capital gains|
Day trading is buying or selling an asset over short periods, such as seconds or minutes. For example, if the market price of one stock changes and a trader can profit, they make the transaction. All positions (purchase or sale) are opened and closed within the same day when day trading.
To legally day trade stocks in the U.S., you'll need to use the services of a broker. Brokers require you to maintain a daily account balance, called a "margin." Trading regulations published by the U.S. Securities and Exchange Commission state that all traders who trade four or more times in five days must keep $25,000 in their margin account to conduct trades.
There is no legal minimum capital requirement to day trade in the currency markets, but it's best to start with $1,000. If you want to day trade futures, it helps to start somewhere between $5,000 and $7,500.
Fees can make a dent in your profits when you're day trading. For instance, say your broker charges a commission of $7 per trade. If you're trading $100 worth of stock, the commission would be a 7% fee deducted from any profit you might make.
Trading more is not always cheaper. It helps to pay attention to fees, the number of trades, and how much you're trading so you can keep from losing money while thinking you gained it.
If you buy this stock with the intent to sell it, you'll rack up a $14 fee to buy and sell the stock. This means you'll need to have a 14% return to break even on a $100 stock day trade—a lofty goal indeed.
Investing consists of buying or selling an asset and holding it for months or years. Investors hold their securities and gain profit from selling them when the market price changes to their advantage. Often, they keep their assets for decades.
Long-term investing is typically done in the stock market. Futures have expiration dates, so they aren't ideal for long-term trades. There are thousands of stocks and exchange-traded funds (ETFs) to choose from. If you're interested in currency trading but don't have the capital for day trading, you can use currency ETFs to trade futures and currencies over the long term.
Starting capital varies when choosing stocks or stock funds. Mutual funds are lower-cost bundles of pieces of different stocks that you can buy. However, buying an individual stock from a corporation or broker can be very costly. For example, one class B share of Berkshire Hathaway Inc. costs over $323 as of March 2022; a single class A share costs more than $400,000.
One of the least expensive ways to invest in the stock market is through mutual funds or exchange-traded funds.
Fees can still add up with stocks and funds. For instance, if you had the same $7 fee for $100 of stock, it would still be 7% of your capital. Your $100 stock would still need a 14% return to cover the transaction fees, but you have much more time to earn the amount than with a day trade.
You can lower the amount of money you spend on transactions by using mutual funds or ETFs that track indexes such as the Standard & Poor's 500 (S&P 500). The S&P 500 is a list of 500 of the best-performing stocks and is managed by S&P Global. The funds that track the list generally have low asset turnover, which can lower your fees and taxes.
Mutual funds and ETFs can include the following fees, but many large brokerages are getting away from charging most of them:
- Management fees
- Sales loads
- Redemption Fees
- Exchange fees
- Account fees
- Purchase fees
Some ETFs might cost less to maintain than mutual funds, and others more. For example, the iShares Core S&P 500 ETF (IVV) has a .03% (of your total investment) management fee and no service or other expense fees. While the fees are low, the ETF had a turnover rate of 5%, which triggers taxes on capital gains.
In contrast, the Fidelity 500 Index Fund has annual operating expenses of .015% of your total investment. However, there is a 2% turnover rate within the fund, which might increase your taxes as the managers sell stocks and create capital gains.
Try to save up at least $1,000 of investment capital before making a stock or ETF purchase (many ETFs can be bought commission-free with certain brokers). This way, commissions don't take such a huge percentage of your capital for each purchase or sale.
Many small purchases will increase your fees. Try to buy stock in larger amounts less often to decrease any fees that are charged.
Trading vs. Investing Personalities
Day trading and investing both take emotional discipline to be successful. This means you'll need to be able to overcome the fear of loss or excitement of gains during the time horizons you have given yourself.
The decision-making process for a day trade can be quite different from a long-term investment—there are different skills and personality traits required for each method. The key difference between the two is that day trading needs more attention throughout the day, where investing requires less monitoring and plenty of long-term patience.
You'll do well as a day trader if you enjoy short-term challenges and finding opportunities to make small profits throughout the day. You'll also need to have the time set aside to focus on trading. If you don't have the patience to wait a year or more for returns, you might find day trading more appealing.
If you don't desire to trade daily, but enjoy a "set and forget" mentality, investing might work better for you. You should be very patient and be able to stick to your plan throughout market downturns.
What Are the Time Horizons for Each Method?
Time varies, depending on what you're trying to accomplish. For the most part, day trading takes some active time every day, while investing takes some active time throughout the month.
Day trading requires a daily commitment, typically of at least two hours. The first hour that U.S. markets are officially open for trading generally is one of the best times to capitalize on large price moves. As lunchtime approaches in New York, stock activity tends to quiet down.
The time you spend on either endeavor depends on what you're trying to accomplish.
Your total time commitment should be about 15 hours per week on the low end and up to 40 hours per week on the high end (if you're trading most of the day). In the U.S. market, the most active time for stocks, currencies, and futures is near the market's opening time each morning. Alternatively, global markets also tend to be active (especially currencies and European stocks) near the European open.
Investing for the long term (and doing the research that goes into it) can be done anytime, even if you work many hours at an office job. When you're ready to purchase stocks, expect to spend a couple of hours per month looking to find ones that follow your strategy. Finding or creating an investment strategy will take up more time in the beginning.
Some people choose to be more active, spending a couple of hours per week doing research (especially if they have lots of capital and are looking for multiple opportunities).
A "set and forget" investor may only need to do a bit of research or check on their investments every few months, possibly when they are ready to make another purchase.
Trading vs. Investing Risk and Return
There is always a risk when trading and investing. The key is knowing how much you can make compared to how much you can lose.
You might be able to make 0.5% to 3% (on the high end) per day. That may not sound like much, but it could equate to between 10% and 60% per profit month.
Higher return percentages may be possible on smaller accounts, but returns are more likely to shift down to less than 10% per month as your account size grows.
With day trading, gains compound quickly. For example, if you start with $30,000 and make 10% per month, you'll have $33,000 to begin the next month with. If you make 10% again, you'll have $36,300. If you make 10% per month for a year, you'll end up with close to $95,000.
Seven days of losses followed by seven days of wins can still equal an overall loss.
However, a day trading account can also decline rapidly if you're losing 1% or 2% of your capital per day. For example, if you lost 1% per day over seven trading days, your account could go from $30,000 to $27,961.96—about 7% of your capital.
If you were to start gaining at .5% per day for the next seven trading days following that losing streak, you'd end up with $28,955,43—still creating a loss. You'd need another seven days of 1% gains or more to coup your losses and create more gains.
The long-term investor has always come out on top after weathering market downturns. The Dow Jones Industrial Average spends more time increasing than decreasing, allowing for more gains than losses over longer periods.
However, investing requires long time frames that can induce losses if you're not able to hold a security through a lengthy downturn. Any given year could see returns much higher or lower than 10% (with negative returns occurring about one out of every four years). Some stocks might never recover to the price you paid for them.
The Bottom Line
Day trading is an excellent way to make money on the market if you have the initial capital and time per day needed to make the trades you want. However, it also takes a strong desire to make money on trades and a solid risk management strategy.
Investing also comes with various levels of risk, but in general, it is less risky than day trading for retail and new investors. If you have less capital to begin with and don't desire to trade every day, investing might be the better choice.
Both methods have proven to work over time, provided you stick to the strategy you develop and overcome any emotions you may experience while trading or investing.
- Day trading is buying and selling on small price movements throughout a trading day, often in intervals of seconds or minutes.
- Long-term investing is buying or selling after long periods of holding an investment and waiting for the right price.
- Day trading costs are based on the number and size of transactions.
- Investing costs are based on the management fees and capital gains taxes.
- On their own, day trading and long-term investing work very well if you follow a strategy and stick to your position limits and size.
Frequently Asked Questions (FAQs)
What's the best moving average to use for short-term trades?
The shorter your trade, the more closely you need to watch short-term movements. That means you should use shorter moving averages that regularly change and update with the trend. Like many aspects of trading, this should depend on your strategy. Some day traders, for example, may look for stocks that are bouncing off of longer-term resistance or support levels, in which case longer moving averages would be more useful.
How do you pick stocks for short-term trading?
The shorter your timeline, the more volatility matters, and the less fundamentals matter. If you're day trading, you may pick stocks based on volatility alone. If you're typically a long-term investor, then your short-term timeline might be a few weeks or months, in which case you may need to pick stocks based on a mix of volatility and business fundamentals.
Financial Industry Regulatory Authority. "Day-Trading Margin Requirements: Know the Rules."
MarketWatch. "Berkshire Hathaway Inc. Cl B (BRK-B)."
MarketWatch. "Berkshire Hathaway Inc. Cl A (BRK-A)."
U.S. Securities and Exchange Commission. "Mutual Fund Fees and Expenses."
BlackRock. "iShares Core S&P 500 ETF Summary Prospectus," Pages 21-22.
Fidelity. "Fidelity 500 Index Fund."