Tuesday, November 4, 2014

Day Trading Vs. Investing: Five reasons why day trading is not for me

When you first think about getting involved in the stock market one of the first questions you may want to ask yourself is this: "...am a trader or am I an investor?". You may also want to look deep inside yourself and identify what exactly is your risk tolerance. It is possible you'll likely fall in to one of the categories below:

I got this diagram from a Wall Street journal article about a year ago and I loved it so much I framed it! I think is extremely important to identify your tolerance for risk before jumping head on in to the wonderful world of stocks.

The phrases "investing" and "trading" may often be used interchangeably. However, it is important to know that they mean different things. Below is a "formal" definition for each one, obtained from Investopedia.com:

Day Trader: An investor who attempts to profit by making rapid trades intraday. A day trader often closes out all trades before the market closes and doesn't hold any open positions overnight. Some day traders use leverage to magnify the returns generated from small stock price movements.

Investor [,long term]: The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit. Holding an asset for an extended period of time. depending on the type of security, a long term asset can be held for as little as one year or for as long as 30 years or more. 

Almost every time I find myself at a social gathering and the stock market conversation comes up; the first questions I get is about day trading and "penny stocks". I immediately tell people that I don't invest in penny stocks nor do I have any interest in them. I also try to explain that I invest for the long term. I often get puzzled looks from people and thus, I have to explain this a little further. Unfortunately, many people I have encountered tend to have a perception that the stock market is a "get rich quick" machine or a place where you either make a million dollars in 2 months or you loose everything you have. I'd like to think this perception is changing and I am doing my part in explaining to whomever is interested, what real long term investing is all about.

From very early on in my "investing career" I realized that I clearly fell in to the long term investor category rather than the day trader side of the fence. Here are the top reasons why I don't have the tolerance to day-trade in the stock market nor trade Penny stocks. 

1. I like my peace of mind and my serenity-- I cannot stare at a screen all day wondering "what will happen" or whether or not is a right time to "jump in" or "jump out" of a position. Even if I had all the time in the world to sit in front of a screen all day; this strategy is simply too nerve wrecking for me personally; just not for me. 

2. I have more interest in fundamentals than technical analysis-- Although I would like to learn, simply out of curiosity I cant say I fully understand exactly what goes on in technical charts and I have more interest in the financial fundamentals and prospects of a company. I feel that if you truly pick a quality stock; whether or not you grab shares at the "bottom" or at the "top" of a range, wont make much difference in the long term. It has never made much of a difference in my personal portfolio. Again, this tides back to the first point of me sitting down staring at charts all day, not for me. 

3. The idea of being a "part owner" of a company is exciting to me on a personal level- being able to say that I own a 'small piece' of Disney, visa, Mastercard, etc. and being able to succeed as these companies succeed as well, is one of the reasons why I am so passionate about the stock market. The other side of the coin, being a day trader means grabbing and selling stocks consistently. You don't really care about the company. Instead, your interest is in the technical graph and what is going on. I am far more interested in the business than its "chart" at a period of time. 

4. I have zero interest in "penny stocks" also known as "hot stocks" "get rich quick" (or get poor quick) trades. Simply not for me. I rather make sure my money is going towards a legit company that discloses all financials necessary for my review. 

5.  Trading costs can add up significantly- Keep in mind that unless you are lucky enough to buy and sell stocks for free (which I am not) every time you make a trade- it costs money! So, this is another reason why I am not a fan of day trading. For me to trade consistently it would mean spending either $4.95 every hour or so or $9.99 depending on whether I use Tradeking or TDameritrade. I would probably end up loosing a lot more than gaining. Also, the stress is simply not worth my time personally.

Perhaps you can relate to some of these or perhaps you feel you can handle all of the above. The choice is yours. As the famous saying goes: "Know thyself" that's the first key to success.

PLEASE NOTE: I am not saying day-trading is a negative thing. I have in fact met people that have been successful day trading. I recall a finance professor I had a couple of years ago; he was an active day trader and didn't believe in 'long term investing'. As a matter of fact, he shared with the class one day that he tried to be an "investor" by holding a stock for about 2 weeks and he lost too much money so he went back to trading (obviously his perception of long term is not the norm). He would come in to class one day saying he just made $5,000 and the next day he would come in bummed because he had "lost $10,000", and vice versa--- all in a days work. 

The purpose of this post is to encourage you to know yourself and truly look inside yourself and understand your tolerance for short term or long term risk. We can never predict the future. Maybe one day I'll gather enough interest or courage to try out this day-trading thing. HOWEVER, I know where my true fundamentals stand; I know what makes me feel comfortable and confident and what I truly enjoy and that is to be a "part owner" of a growing, successful company for more than a few hours a day. 

Thank you for reading!

Would love to heard your thoughts on this one-
Tell me, are you more of a day trader or a long term investor? 

Cheers to profits,

*I am long Disney, visa, Mastercard