What's the difference between long term investing and day trading? In short, one is for the long term, and the other is very short term, usually with a time horizon of less than a week. One requires very detailed technical analysis, and the other focuses on fundamental analysis. One has a higher failure rate than the other.

Neither day trading nor long term investing will make you rich overnight, but both have great potential when you maintain persistency and diligence. So, what is the best way to invest your money for the best returns? That depends on your investing style. Here are the differences between day trading vs. investing in stocks.

What Does It Mean To Day Trade Stocks?

Day trading stocks means to buy and sell shares of a company, usually within a single day but sometimes holding shares for up to a week at most. Day traders make short term trades with expectations of a price increase in the near future.

If I expect that Amazon stock is likely to increase in the next few hours or days, I would purchase Amazon shares and sell them at a higher price when the price has increased. Trading involves technical analysis and higher amounts of capital. Because you hold your investments for short periods of time, your account balance is likely to be more volatile day in and day out as you make and lose money.

Day traders often have goals to achieve small gains per day, generally around a 1% growth goal per week (give or take). Of course, this is the goal, but it isn't easy to do.

Technical Analysis

Day traders focus mainly on technical analysis to drive their investment decisions. Technical analysis analyzes a stock's price and volume, along with trends and chart patterns to determine investment opportunities.

Success Rate For Day Trading

According to Forbes magazine, the typical success rate of a day trader is a whopping 10%. In other words, 90% of people who day trade lose money and quit.

Why is it so difficult? Predicting the future is no easy task, especially basing your decisions on price patterns and chart movements. To be successful, one must understand the most common patterns, trends, and indicators and how the stock market moves to be successful.

Capital Requirements & Risk

In order to day trade stocks in the United States, you need at least $25,000 in your account to comply with regulations. There are ways to get around that regulation, such as placing less than one trade per day, having multiple brokerage accounts at different firms, or trading on a platform outside of the US. The threshold applies when a trader is placing more than 4 trades in a 5 day period. Read more about day trading regulations in the US at Finra.org.

Due to the technicality and the higher capital requirements, the risk of day trading is among the highest risks for different investing strategies. Let me remind you, only 10% of day traders are successful, and the other 90% are losing money.

What Is Investing?

On the other hand, investing means researching a company and purchasing shares of that company for the long term, usually 5 years or more. In fact, Warren Buffet once said if you aren't comfortable holding an investment for 10 years, don't consider holding it for even 10 minutes (paraphrased).

In my opinion, long-term investing is the best way to make money in stocks and truly build unlimited wealth. The research involves fundamental analysis, you can choose multiple vehicles to invest with (individual stocks, ETFs, mutual funds, etc.), and the stock market as a whole has an ever-growing upward trend for the long run.

Fundamental Analysis

Where technical analysis is researching prices, volumes, and chart patterns, fundamental analysis looks at the fundamental makeup of a company or investment vehicle. It involves looking at a company's financial statements, the market opportunity, the customer sentiment of the product or service, the company culture, and their growth ratios (like revenue growth, earnings per share growth, return on equity, etc.).

When you find a company with strong indicators based on fundamental analysis, you invest in that company and let your money grow with it.

Success Rate For Long Term Investing

If I told you the stock market's success rate is 100%, would you believe me? Let me explain. The US stock market has experienced many events causing the market to drop significantly. But, 100% of any recession, depression, or market correction has returned to its former prices and went on to exceed those prices.

See the graph below to show how the S&P 500 has an ever-upward trend over the long term:

Does that mean investing for the long term is a 100% success rate? Not necessarily. But it gives you an idea that if you pick good investments and hold onto them for years on end, your chances of ending up with more money than when you started are very high. Even if you just invested in an S&P 500 index fund, you can expect a modest 8% – 10% return since that's its average return over the last 50+ years.

Capital Requirements & Risk

Traditionally, investing in the stock market required minimum balances of thousands of dollars, and one could only invest in whole shares. With modern technology, anyone can invest in the stock market without any capital requirements and with as much as just $1.

Popular apps like Robinhood, M1 Finance, Acorns, or Public all let you start investing with any dollar amount and no balance requirements.

The risk of investing in the stock market for the long term is minimal compared to day trading. That's not to say that there is no risk at all because there is always the risk of losing your money in any investment. Ways to mitigate that risk are diversification, keeping a long term buy and hold strategy, and doing proper fundamental analysis before purchasing.

Day Trading & Investing Compared

How does day trading compare to investing in the stock market for the long term? See the graph below for a snapshot of day trading and investing characteristics:

CharacteristicsDay TradingInvesting
Time HorizonLess than 1 weekYears
ResearchTechnical AnalysisFundamental Analysis
Success RateLowHigh
Time to ManageHours per dayHours per week
Experience LevelExpertBasic
Capital Requirements$25,000No Minimum

Successful day traders can make a lot of money, but it comes with significant risk. Investing in stocks for the long term can make a lot of money as well, but it comes with less risk and more satisfaction (in my opinion).

In fact, take a look at my investment account's growth rate that I opened on March 20, 2020. I funded it with $250, then began investing just $50 per week. Here are the returns as of October 31, 2020 (less than one year):

That's outperforming the S&P 500 index by roughly 35% for the same time period! Take a look at my YouTube channel, where I document this investment account's details where I invest just $50 per week.

What Should You Do?

Your chosen strategy for investing will largely depend on your knowledge, expertise, and the amount of time you wish to put into managing your portfolio. If you ask me, investing in the stock market for the long term is by far the best way to grow your money and build wealth, hands down!

Want to learn how to invest in the stock market successfully? Take a look at this course: You Don't Have To Be An Expert To Invest In Stocks!