Should you day trade or invest? The answer is… they are not the same.
A very common misconception I see online and especially on YouTube in the stock market
and investing industry is the confusion between day trading and investing. The general consensus
is that you should not day trade, you should just invest, buy and hold, and collect that
annual return of 7 to 9 % instead.
And I know that this statement isn’t completely wrong. It stems from the fact that most day
traders lose money and cannot even beat the market. Also day trading is more stressful,
it involves a lot more work, versus if you had just bought and held for the long term
capital gains and dividends.
As a very active full time day trader myself, Let’s get this straight here today once
and for all. Day Trading cannot be compared to Investing. We’re going to dive deep into
the differences, the similarities, the percentage of profits from either day trading or investing
today.
Let’s lay out the facts on day trading and investing right now. Day trading is the act
of buying and selling stocks in a single day, hence taking advantage of the stock’s intraday
price fluctuations, or price action. The stock could be moving up and down due to fundamental
news, earnings, FDA trials, or global political news.
Investing is the process of committing money to buy assets in the expectation of future
appreciation of value, with the goal of generating income or selling for a profit.
For example, this could be buying apple stocks in your portfolio today at $400 thinking that
it could become $800 in 3 years or more. Or buying a home in a up and coming neighborhood
thinking that the housing market in the area will increase 20% or 50% in a few years.
Or hitting that like button to investing in this channel thinking it will make it rain
lamborghinis in the future. No other investing assets will do that for you my friends.
Now lets talk about the Key differences of what makes day trading and investing different.
The obvious difference here is the holding period of stocks. Day trading you are closing
your position within a single day. Sometimes in hours, minutes, or even seconds. Yes seconds.
But buy the end of the day, the entire account is all cash. Meaning you have no positions
left long or short.
Whereas when you’re investing in the stock, you are most likely holding the positon long
for months, years, and some decades.
The second key Difference is the way you see the stocks or assets you’re holding.
If you’re investing in a stock, it’s most likely because you see the value in the business,
or the sector. You could be investing in Tesla stock because you see the long term potential
of electric vehicles. Maybe you think that in the future more cities and countries will
move towards gasoline free modes of transportation. And policies will favor these vehicles that
are more environmentally friendly.
Therefore you think valuations of stocks like Tsla or NIO, which are both electric vehicle
production companies will rise. You see the big picture, you think the industry value
will double or quadibpel in years or decades.
Now as for day trading, i hate to break it to you. 80% of the time, I have no clue what
the company does. Does the company make money? What sector is it in? Whats the book ratio?
Will it go up 20% in a few years?
All i care, as a day trader, is whether it can go it go higher 20%, today. Or can it
move 2 to 3 dollars within a single day. Remember we are talking about closing all the positions
by the end of the trading day at 4pm EST.
Essentially in day trading you are treating the stocks we buy and sell as trading vehicles
that are moving, not because of its potential appreciation in value. We buy the stock because
its moving up in an uptrend, or breaking out, squeezing to the moon.
Or we are shorting the stock because we know its a worthless piece of trash, its only being
pumped up by stock manipulators with some bs news so they can do an offering at the
high of the day and dump on unsuspecting shareholder who end up bagholding these turds.
And also like you just heard, in day trading you have these more exciting languages too
that i just used. Whereas in investing, what can say about this apple stock.
Very important though I'm definitely not saying fundamentals only matter in investing, and
only technicals matter in day trading. What i'm saying is that in day trading we need
to know the fundamentals that matter short term, premarket or sometimes the moment the
news is announced.
We don't care what the fundamentals do for the valuation in 2 or 3 years, But its more
important we understand how fundamental will move the stock price technically, today. In
trading you dont need to be smart, but you need to be observant and have a sharp response
to piecing together information really quickly.
The third difference between day trading and investing, and also the reason why day trading
could generate so much more % return in the short term (if done right), is the term leverage.
When investing in real estate, you have the benefits of using borrowed money from the
bank to purchase a home. Let’s say you are qualified to buy a $1mil home. if you put
down 30% downpayment of 300k, and the bank lends you the rremianing 70%.
You could do the same when investing in stocks too. you could leverage up to 50% in the united
states. So if you have 5K in your investment portfolio, you could get up to 10K worth of
buying power to purchase stocks. But keep in mind margin investing has lot of risks
and its generally not recommended. I personally do not invest in stocks on margin.
But in day trading, leveraging your capital is extremely beneficial. You could get up
to 3:1, 4:1, or sometimes even 6:1 buying power intraday. So with the same 5k, could
get 15K to 20K buying power.
So for example, if tesla is at $1650 right now, normally if I'm investing in cash 5K
, I could only buy 3 shares of tesla. Whereas if im day trading tesla with the intention
of buying for the dip here and selling it for a quick bounce, I could buy up to 12 shares
of TSLA. since my broker allows me 4:1 leverage when trading on a margin account.
So if I sell my Tesla for a bounce of 50 points. Then I made $50/ share. On 12 shares thats
$500 return, only using my own $5k of capital. On top of that, margin accounts allow day
traders to short sell, which means you profit when the stock is dropping. If you were using
a cash account you cannot short sell.
While we’re on the topic of leverage for both day trading and investing, its important
to discuss the risk associated with it. It’s important to not over leverage, whether we’re
talking real restate investing or day trading.
When used properly in, margin buying power allows traders to get more upside return using
less capital. And thats how traders can build their accounts quickly. Its not uncommon to
see good traders grow their account 50, 100, or 300% in a month.
But at the same time, that also means day trading on margin has a lot more downside.
Using the same example previously, if Tesla stock goes to 0 hypothetically, which i really
hope doesn't happen… not only do I lose the entirety of my account capital of $5K…
I will also owe the broker $9200.
Speaking on the topic of risk, this brings us to the 4th key difference between day trading
and investing. Warning, day trading is inherently a riskier practice than investing, especially
if you do not hit the like button.
It’s not uncommon to hear about beginner traders lose 50% or 100% of their account
in 2 or 3 months. Or if you are shorting selling on margin, you could blow up when a low float
stock runs 200-300% against you to the upside.
Thats why, I’ve always stressed on this channel… if you’re not willing to learn
first by paper trading for a couple of months first, and if you’re not going to put in
the work outside of market hours to learn steps and backtest your strategies, if you’re
just going to follow some chat room alerts to buy at the high of the day breakout and
treat this like gambling, do not day trade.
Now the number 5 key difference, and this is perhaps the distinguishing factor between
day trading and investing. Is that day trading, is a business. It’s essentially a career
and just like your normal 9-5 job.
If you’re investing, you can just look at the market once or month, or like I do.. Once
every six months to get a sense of what my investment portfolios are doing. Investing
is meant to be for a long term in 10 years or more, and for retirement for most people.
I have my active career income which is day trading. And I take out profits from there
and have it deposited automatically into my investments monthly.
Also from a tax perspective, in both United States and Canada. Day trading income is taxed
very differently from investing income, because they are not the same. In the US Day trading
is taxed the same way as employment income, whereas long term investment income are taxed
more favorably and theres more tax breaks.
And its the same way here in Canada, day trading is considered business income and is 100%
subject to top marginal tax rate. Whereas investments qualify for the capital gains
tax rate, so only 50% of the investment income are taxable.
I’m definitely not saying day trading is better than investing, or the other way around.
Im just here to clarify the big difference here. You can definitely do both, at the same
time like I do.
I definitely do invest regularly with my day trading income. In fact, many profitable day
traders I know are some of the best long term investors, in both the stock market and in
real estate.
Day trading is a business, it requires a lot of hard work, upfront capital, months and
years of studying, observing price action and market tuition. It’s a a jo
For people who dont want a second job and just want a slow, stress free approach to
profit from the stock market, and collect that 5-7% annualized return, just invest in
safe blue chip stocks like apple or johnson and johnson, or index funds for 10 years or
more, do not day trade.
It’s extremely important to understand that you cannot treat day trading as investing.
Because if you do, you can actually lose a lot of money. The most common practice in
investing in the stock market is to buy and hold. But definitely cannot do that in day
trading.
If you buy and hold, that could easily turn into hold and hope, or bagholding. And we’re
talking about fancy bags like LV or gucci here.
Now that you understand the big difference between day trading and investing, If you
want to learn more about day trading, i have many beginner friendly videos on my channel.
If you appreciate the in depth analysis.