Last Updated on 19 November, 2022 by Samuelsson
Can trading really be a good investment?
Trading is one of the methods of playing the financial markets. Traders seek gains from the market by taking advantage of price changes over a relatively short duration. But is trading a good investment?
Technically, trading is an active business, even when it is completely automated. When planned and executed well and it’s consistently profitable, trading can be a very good investment, as it has the potential for huge returns. However, trading also involves a lot of risks.
In this post, we’ll take a look at the following:
- What is trading and how does it work?
- Is trading a good idea?
- Is trading more profitable than investing?
- Day trading vs. investing
What is trading and how does it work?
Before judging whether trading is a good investment, you must know what a trade is and how it works.
Trading is the buying and selling of securities in the financial markets. These securities can be stocks, currencies, commodities, etc.
As a trader, your job is to spot opportunities in the markets and act accordingly to make a profit. Unlike investing, you can trade on both sides of the market – you can buy a bullish market and sell a bearish market.
Is trading a good idea?
Yes, if you have the skills. Some people have quit their jobs to become full-time traders, while others trade part-time. Trading provides many money-making opportunities in the short-term, which you might not find in investing.
All you need as a beginner trader is to learn it the right way, and you will be on your way to making some good income.
Is trading more profitable than investing?
There is no universal answer to this: it depends on who you ask: A successful trader would argue that trading is more profitable, while a successful investor would argue otherwise.
However, what is certain is that both trading and investing imply risk on your capital. But trading comparatively involves higher risk and higher potential returns as the price might go high or low in a short while. So, even if trading has a higher potential return, its high risk makes it unsuitable for some individuals.
Read more: Trading Cost
Shares trading vs. Investing
Investing is simply buying and holding securities (in this case, shares) for long-term gains. An investor doesn’t have to worry about daily fluctuations in the price of a stock, unlike traders. Investors have to do thorough research about the company before investing. They have to understand what the company does and how its environment affects its growth.
A stock trader, on the other hand, frequently buys and sells securities for short-term profits regardless of the company’s financial state and business model. The little profits from trading can be substantial when they accumulate. Traders often focus on technical analysis and use tools like moving averages and the relative strength index to find high probability setups in the market. Depending on the timeframe, a stock trader may use different trading strategies.
Types of Traders
There are basically four categories of traders in the market — scalpers, day traders, swing traders, and position traders.
- Scalpers. This category of traders uses day trading strategies that involve buying and selling securities within a short time for small gains. The time frame for scalping usually ranges between seconds to minutes. One of the downsides of scalping is the fees you pay for each trade. You might run at losses if the trade fee overwhelms your profit. Before becoming a scalper, you should have demo tested your strategy and know the ins and outs of the securities you want to trade.
- Day Traders. These traders employ the day-trading approach, which involves buying and selling shares (regardless of the company’s fundamentals) within a day. This means that all trades executed must be closed before the end of the trading day. Unlike scalping, day trading usually holds trades from a few minutes to several hours. However, all open trades must be closed before the market closes each day. Scalping and day trading may not suit all traders because it requires more screen time. For a more conservative approach, you should consider other strategies.
- Swing Traders. Traders in this group make use of a short-term or medium-term trading strategy. A swing trader focuses on the higher timeframe and keeps trades open for a longer time, usually several days to a few weeks. It is a conservative approach to trading the financial markets. As with most things, practice makes perfect in swing trading.
- Position Traders. These traders make use of a long-term approach to trading the market. Position traders mostly follow trends. Position traders may have open trades for weeks to months, and even in extreme cases, years. This is the most conservative approach to trading the market. As a position trader, you open fewer trades and keep them open as long as a trend exists.
Day trading vs. Investing
So, what sets day trading strategy apart from investing? Day trading is an active business, while investing is having your money work for you while you do other things. However, a seasoned day trader can make as much money, over a short time, as an investor could make in a year.
|Day Trading||A day max.||Unlimited||Not necessary|
|Investing||Months, years.||Up to 20% annual return||Very necessary|
How much do day traders make?
Whether you’re trading for yourself or you’re working for an investment firm, the money you can make as a day trader is impossible to say. If you’re trading for yourself, your income is dependent on your trading capital, risk tolerance, and draw-downs. And if you’re trading for a prop trading firm, your bonus is dependent on your profits.
According to a Glassdoor salary report in 2021, the average day trader’s income is around $74000 annually. This amount is not set in stone because some day traders can make up to six figures and others make less than the average income.
Trading is a high-risk activity. Only experienced individuals make money from it over the long term. If you put in work and time to understand it, trading can be a good investment. But note that it has been reported that about 80% of retail traders lose money.