Long-term investing and day trading have similar goals but take different approaches. Both want to make money in the stock market – they’re just on opposite ends of the risk/reward spectrum.
Imagine two people at the beach. One person is surfing the massive breakers – a thrilling, dangerous, intense experience. Another person is just chilling on the beach, drink in hand, watching the tide roll in. Same sand, same sun, same ocean. Both people are having a great day at the beach – but their experiences are very different.
So, if you plan to risk real money in the stock market, you first need to decide which strategy you will use. Are you an investor lying back with a drink in your hand? Or, are you a day trader catching waves and riding the adrenaline?
Answering that question requires you to understand some things about the market and yourself. This article will break down the concepts of investing and day trading, analyze the differences, and offer some recommendations.
What Is Investing and Day Trading
Before choosing a strategy, we need to understand some basic concepts. Let’s take a look at investing and day trading in more detail.
Investing is a long-term wealth protection and growth strategy, usually part of a retirement plan. In practice, this means using capital to purchase stock or mutual fund shares, then waiting years or decades for those shares to grow in value.
For example, consider a person with a full-time job and a family. He doesn’t have much time to spend on his investments and doesn’t want to take a big risk with his hard-earned money.
His solution is to invest in an exchange-traded fund (ETF) that tracks the S&P 500, which historically returns 10% per year, on average. He sells the shares upon retirement.
Day trading is a short-term strategy with high risk and high reward. You try to profit by buying and selling stocks based on small market fluctuations. In practice, you are betting that stock prices will shift in your favor on any given day.
For example, consider a single person with a high salary. She has disposable income to open an online brokerage account.
After some research and analysis, she identifies a stock she expects will rise following an earnings report. She buys shares before the report and sells them later that day after the announcement.
Main Differences Between Investing and Trading
Let’s look at some of the key differences between investing and day trading. And remember, we are looking at opposite ends of a spectrum. In reality, traders can exist anywhere between these two extremes – and usually do.
|Asset hold time||Years or decades||Days or weeks at most – the longer the hold, the greater the risk|
|Capital requirements||Any amount||High – $25,000 minimum for making more than 4 trades per week|
|Diversification||High – reduces risk||Low – must bet big on individual stocks|
|Buy & sell activity||Monthly or yearly – an investor might buy at regular intervals, and sell only upon retirement||Daily – sometimes multiple trades per day|
|Commission and fees||Low – buys monthly at most and rarely sells||High – pays a commission on every daily buy and sell|
|Volatility exposure||Low – unaffected by short-term market fluctuations||High – sudden fluctuations could be disastrous|
|Analysis type||Fundamental – investors look for opportunities based on company fundamentals||Technical – traders look for opportunities based on technical factors|
|Asset type||Growth – investors seek stocks that will grow steadily over time||Volatile – traders seek out stocks with wild price swings|
|Withdraw funds||Rarely – the funds are only needed upon retirement||Regularly – funds might be needed for living expenses|
Looking at Their Benefits and Drawbacks
Every strategy has strengths and weaknesses. The important thing is to choose the strategy that best aligns with your goals. Let’s take a closer look at the benefits and drawbacks of investing and day trading.
- Market volatility protection: Long timelines and diverse portfolios protect against short-term fluctuations in stock prices.
- Minimal time commitment: Once you invest, you don’t have to do anything else. Just sit back and watch your money compound and grow over time. Check your tracked portfolios less frequently.
- Limited emotional decisions: If you know you’re in for the long haul, you are less likely to make short-sighted, emotional trades.
- Extended timelines: While also a benefit, the long timeframes required for investment can dissuade some who want quicker returns.
- Trader envy: It can be challenging to watch day traders make 1000% returns with quick trades while you wait seven years to double your money.
- Big win potential: The main benefit of being a day trader is the potential for quick, huge returns. While an investor makes 10% per year, the trader could make 10% daily.
- Work from home: Thanks to information technology, a day trader can work from anywhere on earth with nothing but a computer and an internet connection.
- Significant risk: Day trading avoids all sound investment advice. Large amounts of capital are invested in single stocks while trying to predict an unpredictable market. Most day traders lose money.
- Full-time job: When done correctly, day trading requires as much time commitment (or more) as any other job. It’s not a quick and easy way to get rich – or a way to avoid hard work.
When is Investing or Trading a Good Option?
Neither trading nor investing is inherently better or worse. The value of each strategy depends on the situation, personality, and goals of the person involved.
Questions to Ask Yourself
- What is my tolerance for risk?
- Can I afford to lose all the money I use to trade – financially and emotionally?
- How much time can I commit to researching and analyzing stocks?
- Do I have the discipline to stick to a trading plan?
- How close am I to retirement?
- What kind of profits do I want to gain?
Answering these questions will help you decide which strategy is most suitable for you.
You should invest if…
- You have a low tolerance for risk
- You can’t afford to lose your investment
- You have a career that you love
- You don’t have significant time to analyze stocks
- You want to protect and grow your savings
- You are content with modest profits
You should day trade if…
- You have a high tolerance for risk
- You have extra capital to gamble or lose
- You want to be your own boss
- You have strong market knowledge
- You are not nearing retirement
- You want big profits
Our Opinion: Investing Is the Better Option for 90% of People
For most people, investing is the strategy they should choose – at least in the beginning. First, set up a safe, diversified, long-term investment plan. As you learn more about how the stock market works, you can consider riskier trades with capital you can afford to lose.
No rule says you must choose one strategy or the other. The reality is that most people involved in the market use a combination strategy. Parts of their portfolio are composed of long-term positions, and other parts are reserved for short-term trades. The key is to understand the difference between both and trade wisely.
We hope you now have a better understanding of how investing and day trading are different and which approach might be best for you. If you are interested in more great content about personal finance, stay tuned to the Stock Market Eye blog.
Investing in stocks of some kind and building up a robust liquid saving account is crucial for good financial health. Though they are both necessary elements of a proper portfolio, they are not identical. Knowing the difference between the two is essential, as is knowing when it’s best to choose one over the other.
There are more than a few disparities between savings and stock accounts, one of which is the risk factor. A savings account is essentially risk-free, although it has a much lower return rate than stocks, which offer high returns with increased risk.
Your goals are also important. Stocks tend to cater towards more long-term goals, while a savings account has much more fluidity, ranging from short to long-term goals.
Differences Between a Savings Account and Investing in Stocks
When saving money, you’re obviously not spending it, but more importantly, you’re putting it somewhere accessible for future use. That can be a savings account, a CD (certificate of deposit), or even physically storing it in a shoe box under your bed.
Investing money requires using capital to buy specific assets, such as stocks, bonds, or real estate. The goal is to grow your money and earn profits over time.
Though many people use the words “saving” and “investing” interchangeably, there are some key differences between the two:
- Risk and Return: Perhaps the most significant difference between the two is their risk and return. Savings accounts earn a bit of interest (very tiny), but FDIC-insured accounts carry zero risk. Investments can make you much more over time, but they can also lose you money if the market turns south.
- Time Horizons: Savings accounts are essentially liquid money that you can access anytime in the near future. Investing in the stock market is often a goal that will transcend years or even decades.
- Products: Saved money goes into savings accounts at the bank or sometimes money market accounts and CDs. You can invest money in various products such as stocks, mutual funds, bonds, art, houses, jewelry, and ETFs.
- Hedge Against Inflation: The super-small interest rate on most savings accounts can’t keep up with inflation. So, in a way, you’re slowly losing a bit to the increasing cost of living. Properly structured investments have a much better chance of outpacing inflation and earning you money.
So, Which Should You Put Your Money Into First?
Putting money into a savings account first is a great way to build your portfolio. Build up an emergency fund or “nest egg” to have stability and easy access to funds should an unexpected expense arise. Once your savings account gets established, you can begin investing some of your money.
When to Put Your Money Into a Savings Account
Many experts agree that having savings for unexpected emergencies should be the first reason you set extra money aside. Keep saving until your emergency fund covers at least three months’ expenses. However, some experts advise up to 6 months’ worth.
Not everyone has the extra cash to set aside a massive nest egg. The act of “fast saving” is how many people streamline their budgets. An example of this would be putting money into an account for a specific purpose each month, like paying your mortgage or making a rent payment.
Short-term saving is also typical if you plan on using the money within a set amount of time, typically a few years. Examples include saving for a down payment on a house or saving up to pay for a wedding.
When is it Better to Save Money in a Savings Account?
The best time to use a savings account is when you’ll need short-term access to the money. Whether for a car, patio furniture, or a kid’s college tuition, you’ll want access to all the money you’ve been putting aside when the time comes.
While it could have grown with an investment, there’s always a chance that the market is lower when you go to use the money, and the amount you have access to is smaller than anticipated.
When to Invest Your Money on Stocks
When investing in the stock market, you usually seek long-term growth. Maybe you’re planning to retire, or you want to build up your assets over a longer time horizon and increase your net worth, so you have something to leave your family.
Stocks, bonds, and even real estate can be volatile in the short term but historically pan out in the long run. So, to get the return you want, the investment horizon needs to be inherently further out.
Many people invest in the stock market for retirement through a 401(k) or a Roth IRA. This type of investment can span decades and continually grow as the interest gets reinvested and compounded over the years.
A Few Things to Do Before Investing in Stocks
Investing and saving simultaneously is ideal, although it does not always play out this way. If you are not doing both and are wondering if it’s the right time to invest, ensure you have a few things in order first.
- Make sure that your emergency fund has an adequate amount in it so you can handle any unexpected expenses.
- Pay off high-interest debt. This type of debt can destroy credit and have harmful consequences. Make sure it gets paid down as much as possible before investing. A good rule of thumb is: if the debt’s interest rate is lower than whatever the return rate of the investment is, then the investment would likely be the better option.
- Have an investment goal. This step is often overlooked but is crucial and must be done in advance, alone or with an advisor. Are you saving for retirement? How long is your investment horizon? What is your risk tolerance? All these are questions you need to go over and have an answer for before you begin to invest. Otherwise, you will be building your portfolio without a sense of direction or an end goal.
When is it Better to Invest in Stocks?
Yes, you should try to get your emergency fund filled out first. However, there is one instance where it is wise to invest before you have that in place.
You should always aim to maximize your 401(k) or Roth retirement accounts if your employer matches your contributions to any degree. Many companies match 2, 4, or even 6% on retirement accounts. The match is free money; unless you are genuinely in dire circumstances, you should make this contribution at all costs.
Savings Account Vs. Stocks: Pros and Cons
Below we’ll look at some of the pros and cons of each type of savings to give you a better idea of which is correct for you right now.
Savings Account Pros
- Saving is simple to do. There is no upfront cost or learning curve.
- Bank accounts are very liquid, so you will have no issue getting funds if you need them quickly.
- You will know upfront what interest you will accrue on your savings account.
- The FDIC guarantees any account up to $250,000, ensuring you will not lose any money.
Stock Investing Pros
- Investing in stocks can have significantly higher returns than savings accounts. Over time the S&P 500 stock index has returned 10% annually.
- Bonds, mutual funds, and stocks are pretty liquid and can usually get cashed out when the market is open on most weekdays.
- A diversified and well-structured portfolio of stocks can beat inflation and increase your purchasing power over time.
Savings Account Cons
- Returns on investment will be low.
- Inflation will reduce the power of your dollar.
- Some banks put monthly management fees on savings accounts.
- A federal law called Regulation D states you can only withdraw or transfer funds a maximum of six times per month.
Stock Investing Cons
- Investing can be complex and may require an advisor for guidance, which will cost a fee.
- Your investments can go down in value.
- Stock market investing typically has a longer investment horizon, meaning you may have to keep funds in the account for several years without access to them.
So, Should You Put More Money Into Your Savings or Stocks?
Both investing and saving are going to be critical parts of building a solid financial portfolio, so one is not fundamentally better than the other. However, each one serves a different role throughout your wealth development.
Investing is going to build up in the long run. However, it is of paramount importance to make sure you are ready to invest beforehand, otherwise, you will be setting yourself up for drawbacks. When high-interest debt is snowballing, or you are one emergency away from financial hardship, you’re not ready to start investing.
Building an emergency nest egg in a savings account gives you security and peace of mind. Those things will allow you to start building wealth in other ways.
Other Questions About Savings Accounts or Stocks
Below are some other questions that we hear our users ask about saving and investing for the future.
Are stocks a good way to save money?
That depends. For specific purposes, such as saving for a down payment on a house or a wedding, a savings account will be a much better option. As an investment, stocks tend to do better than cash over the long term, but their volatile nature means you could end up with less when you need it in the short term.
Are there stock savings accounts?
You can use a brokerage or money market account like a stock savings account by buying stocks, bonds, mutual funds, and ETFs and letting the money sit there for a while. Just remember the time horizon needs to be further out to see stable results.
What about the stock market vs. a 401K? Which is better?
Investing of any kind is excellent and gives you a substantial leg up when it comes to building wealth. There are an incredible amount of individual stocks, bonds, and other publicly traded assets on the stock market, each with a slightly different roll of the dice on their projected gains.
If your employer offers a 401(k) plan, especially one that they match, you should invest in that immediately. An employer-matched 401(k) is guaranteed free money in whatever percentage they match. Plus, your 401(k) will be catered towards your retirement and will come with unique benefits upon retirement.
Are CDs better than investing in stocks?
When it comes to investments, everything comes down to risk tolerance. CDs are considered low-risk investments and have a fixed rate that you’ll earn. Stocks have a much broader range of risk profiles and are generally regarded as a higher-risk investment.
One is not better than the other. Your risk tolerance and investing goals will determine which is better suited to your needs.
Are CDs better than using a savings account?
CDs offer a fixed interest rate if you don’t touch your money for a specified time. A savings account will allow more flexibility to withdraw funds whenever needed.
Generally speaking, the best option depends on how frequently you intend to touch the money and how long you are willing to leave it in the account.
In finance, you will often hear the names “bull” and “bear” describe certain market conditions. For example, you may have heard that the U.S. has been in the bear market territory for most of 2022. But what do these large animals have to do with investing, and how often do they rear their heads?
Let’s look at bull markets vs. bear markets and see what kind of impact they can have on your investment portfolio.
What is a Bull Market?
When a market is “bullish,” it is typically either rising or expected to shortly. Generally speaking, market observers will call it a bull market when markets rise and continue to without falling more than 20% from a previous 52-week high.
What is a Bear Market?
A “bearish” market is one that is in the process of consistently falling for an extended period. A market is officially a bear when conditions are falling or expected to fall by 20% or more from its previous 12-month peak.
Factors That Define Bear and Bull Markets
The first part of 2022 has been a US market bear, and it doesn’t seem like there will be much reprieve in the near future. Some experts are even predicting that there will officially be a recession within the first two quarters of 2023.
Several things determine whether or not a market is heading into bullish or bearish territory. Everything from supply and demand, sharp changes in economic activities, and investors’ psychology and emotions will directly affect the market’s direction. Take a closer look at some common factors that affect the market below.
A bubble is the rapid increase of market value immediately followed by a sharp drop in value, often referred to as a “crash” or “the bubble popping.” Bubbles are often surges in asset prices, typically driven by erratic market behavior.
Assets are typically traded at far higher price ranges than usual during a bubble, far exceeding their actual inherent value. Bubbles are usually only identified after they burst and a massive price drop occurs.
Tulip mania in Holland from 1634-1637 is one notable example of a bubble bursting. A more recent example is the 2008 housing crisis.
Production costs, supply and demand, and monetary policies all affect the price of goods. Inflation is when prices rise. There is some expected and average inflation over time, but sharp increases can be problematic.
Price inflation influences both bull and bear markets and vice versa. During a bull market, when the economy thrives, production might increase, and people could buy more or have extra money to spend, slowly driving prices to creep upward.
Consumers tend to dial back spending in a bear market and get a bit more conservative. Shrinking demand can cause rapid deflation in extreme cases.
According to a 2015 Swiss Finance Institute study, in cases with a well-known “prewar phase,” any increase in the likelihood of war tends to decrease stock prices. However, if a war breaks out, their price will increase. On the contrary, when war erupts as a surprise, the initial outbreak decreases stock prices.
This phenomenon is “the war puzzle,” and there is no apparent reason for the behavior. Overall, U.S. markets tend to stay steady during wars. From 1939 to 1945, during World War II, the Dow was up more than 7% per year and 50% in total.
World events such as natural disasters, terrorism, and civil unrest can affect markets. 9/11 had a direct effect, as many investors chose to trade less and choose more conservative investments.
Indirect influence also regularly happens in markets in response to world events. For example, in response to military actions abroad or civil unrest, the stock prices of military equipment and weapons manufacturers will likely rise due to defense contracts.
Current Interest Rates
Lower interest rates are typically associated with bull markets, while the opposite is true about bear markets. Higher interest rates slow companies’ expansion and growth, putting less money in investors’ pockets. On the other hand, lower interest rates make it more affordable for businesses to borrow money and increase their production and growth strategies.
Overall Sentiment or Emotion
Human psychology plays a significant role in the price of stocks, with investor sentiment and emotion being a sizable factor in the market’s overall direction.
In bull markets, investors are much more eager to participate in trading and take more risks to earn a profit. People will buy new technology, make stock gamble plays, and hold positions longer during upward trends.
In a bear market, when the sentiment is less optimistic, investors tend to transfer their money from equities to fixed-income securities as they wait out the downturn. These downturns in stock prices cause hesitation and doubt, leading investors to pull their money from the market, which causes a general price decline.
A History of Bull vs. Bear Markets in The USA
Both bull and bear markets are cyclical economic events that have happened many times throughout U.S. history. Analyzing their history can help to make better investment decisions, regardless of the current market trends.
US Bull Market History
Bull markets take up much more time than their bear counterparts and are much more robust. The average bear market decline has been 27%, while the average bull market gain has been 167%. Since World War II, there have been 13 bull-bear cycles in the U.S., with the average bull market lasting 1,630 days and the average bear market lasting only 419.
It has taken the economy an average of 26 months to recover from a bear market. However, it has historically recuperated just fine and has rebounded even stronger each time.
US Bear Market History
Bear markets are diverse, if anything, varying in severity, length, and impact. Between the end of World War II and April of 2022, there have officially been 14 bear markets. Based on historical Bloomberg data, their severity fluctuated from a 51.9% drop in the S&P 500 to a 20.6% decline.
Bear markets can occur broadly over entire markets or just in particular sectors. Economic activity is a cyclical series of bull and bear markets. Over the long term, bull markets have gone higher and lasted exponentially longer than bear markets.
How Frequent Are Bear Markets?
Famous examples of bear markets include the dotcom crash (2000-2002), the stock market crash of 1929, and the bear market following the housing market crash (2007-2009). A recession often accompanies these bear markets, although this is not always the case. Of the 25 bear markets in the U.S. since 1928, only 14 have seen recessions, while the other 11 did not.
What Do Investors Do in Bull Markets vs. Bear Markets?
Savvy investors should seek to take advantage of the rising prices in a bull market by regularly purchasing stocks and selling them off to actualize their profits. Losses in a bull market should be less severe and fleeting, as investing in equities when the market is bullish should equate with a higher probability of profit.
It’s difficult to escape drops in your portfolio during a bear market. Losses will be more common, and timing the end of the bear market will likely be tricky. Because of this, short selling becomes a more attractive option. Although many investors simply elect to put their money in safer investments, such as bonds and other fixed-income securities.
Dividend Stocks Can Hedge Your Losses
Many investors also turn to dividend stocks, whose performance in the market is typically affected less by changing trends. These industries, often things like utilities, are designed to be excellent hedges against inflation and are stable in both bull and bear markets.
The Long Game Investors Don’t Deviate From the Plan
The market is ever-changing. It can be volatile or steady, and everything can change overnight. Because the market changes so much, plenty of stimuli may sway an investor’s choices, making them deviate from their plan.
Buy-and-hold investors have a set amount they invest on a schedule. They do not deviate from that plan, regardless of world events and how they affect the markets. These types of investors are playing the long game. They are looking at their investments for years and decades rather than the volatile daily or monthly life occurrences.
Don’t Navigate Bull or Bear Markets in the Dark
Investing takes time, knowledge, and experience. All of that can be costly, even for investors that have been following the markets for years.
StockMarketEye is a stellar way to follow your investments, regardless of the type of market. You can also stress-test your portfolio against potential market conditions and compare your standings against historic market numbers of the past. This design allows the software to tell you if you beat the average, fell short, or are about par for the course.
The longest bull market was from 2009 (after the housing collapse) until 2020 when the COVID-19 pandemic hit and tossed everything out of whack. Over those 11 years, a 30-year-old investor might have only experienced growth and profits since before they could order a drink in the bar.
Were you ready for the current bear? Do you have a plan in place for a possible upcoming recession?