The stock market is risky but equally rewarding. There are basically two ways by which people make money in the stock market – trading or investing. Here, you may either invest for the long-term or trade to build wealth through day trading (also known as Intraday trading). However, both these are two different approaches to make money in the equity markets.
When you invest in stocks for the long-term, it primarily means that you hold on to the investment for a longer period of time, probably between three to five years or more. In comparison, intraday trading means that you square off all your positions before the end of trading hours on the same day. You do not hold the shares for more than a day i.e. do not take delivery of the shares when you undertake intraday trading.
In this post, we are going to discuss the difference between Intraday trading and long-term investment. Here, we’ll look into different factors like holding period, capital growth potential, risks involved, and more. Let’s get started.
Differences between Intraday Trading vs Long-term Investing
1. Holding period
Long-term stocks are held for several years and any fluctuations in the short-term do not affect your investment decision. Here, holding period may vary from two years to even several decades. In comparison, in Intraday trading you do not keep any position open at the end of the hours on a trading day. A holding period maybe between just a minute to a few hours.
2. Capital growth
When the price moves in the expected direction, the trader will exit his intraday stock position. For example, if you have purchased 100 shares of ABC Limited at INR 50 and the price increases to INR 55, you will sell the shares and book the profits. Similarly, you will cut your loss in case the price decreases, using tools like stop loss.
However, with long-term investments, short-term price fluctuations do not affect your decision. The stocks are held for several years allowing you to build wealth through capital appreciation.
3. Risks Involved
There are inherent risks to intraday trading as well as long-term investing. However, the risks in day trading are higher as price volatility can be significant in just a few hours. Because daily market fluctuations do not affect long-term stocks, risks involved with long-term investments are lower. Here, investors have the potential to create wealth through dividends and price appreciation over the years.
4. Art versus skill
Day traders require technical skills to analyze and study market trends. Moreover, Intraday trading is also related to market psychology. On the other hand, long-term investing requires skills to identify good and reliable stocks. Here, investment decisions are primarily based on the business model, financial strength, and company philosophy.
5. Investor profile
Traders want to potentially earn higher profits from the daily price fluctuations. However, here if you miss the right time, it may result in huge losses. Intraday stocks are identified based on price volatility during the trading hours. On the other hand, long-term investors do not rely on trends and invest based on the fundamentals and value of the company over the years. They patiently hold on to the shares until the desired price levels are reached.
Let us now look at the pros and cons of intraday trading and long-term investing.
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Pros and Cons of Intraday Trading vs Long-term Investing
— Pros of intraday trading
- While Intraday trading, substantial profits may be earned in a shorter period
- You require a lesser principal amount and enjoy benefits of margins.
- You do not have to lock-in your investment for the long-term enabling you to trade more frequently for higher profits
- Most reliable brokers like mastertrust offer margin trading on intraday stocks providing higher leverage for your capital
— Cons of intraday trading
- The price volatility increases the risk of losing money
- Knowledge of technical analysis is necessary and you cannot rely on tips received from others
— Pros of long-term investing
- Historically, when you invest in the equity market for a longer period, you are able to earn returns that are more than the rate of inflation, which allows you to build wealth over the years
- Long-term stocks benefit from economic growth resulting in higher revenue through an increase in consumer demand, which bodes well for an increase in its share price.
- Long-term investing not only provides capital growth through price appreciation but also allows you to earn more returns through periodic dividends.
- These days, it is very easy to invest in shares for the long-term through a stockbroker or online platforms.
— Cons of long-term investing
- There is an inherent risk of losing the principal in case the company does not perform as per expectations resulting in the decline of its share price.
- Share prices change from one minute to the next. Many times, the investment may be based on emotions rather than sticking to the fundamentals.
- Long-term investing means a long holding period that may last for three to five years or longer. This also means that you won’t be able to leverage your money to earn higher returns, from other alternatives.
Both intraday trading vs long-term investing are proven ways to make money from the stock market. The decision to invest for the long-term or intraday totally depends on your requirements, financial goals, investment horizon, and risk profile. Further, here the diversification to allocate your money to various assets should be based on your financial goals.