Both day trading and long-term investments are often associated with the same field of investing. Despite this, these are completely two different ways to rotate the funds. Differences prevail here and there are relatively few similarities. A long-term investor focuses on constructing so-called portfolios, which contain shares of listed companies or other assets selected through fundamental analysis to bring profit in the future. Trading and investment are linked to each other based on the direction of the context for a given instrument by combining a large amount of information.
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The difference is the nature of this information.
A stock trader specializing in short-term trading does not have to pay too much attention to the instrument on which he speculates. It can be said that for him this instrument is subject to the same rules as the rest.
The information it uses is the opening price, the closing price, the highest and lowest prices, and the numbers representing the accepted orders.
In the case of short-term investments, turnover serves more to recognize the momentumthat may end tomorrow. Data on the state of the company, market capitalization, the condition of a specific sector of the economy, competition and a number of other information of a fundamental nature are of greater importance.
Trading vs. Investing.
Short-term trading in a broader sense consists of reading the record of transactions carried out on the market and taking advantage of the momentum that appears on it. The ratio of demand to supply when it comes to long-distance stock market investment is of lower importance. Macroeconomic conditions are more important here. Therefore, an investor, unlike a stock market trader, must specialize in analyzing information about a given instrument and in understanding economic information.
Another important thing is to master advanced budget management techniques. This includes diversifying the investment portfolio by spreading the risk across different instruments. The ways of constructing portfolios are different, simple and more complex. From here, you can choose separate shares of listed companies or invest in stock indices ETFs.
However, when deciding to trade short-term, you also need to have a certain range of knowledge, without which you will not be able to make money regularly.
This type of investment is called investment strategies that assume as few trades as possible, while maximizing returns. The coronavirus pandemic has made long-term trading a popular form of earning among novices. They want to improve their budget with a simple "buy & hold" principle. However, this is not true passive investing. How to understand this type of investing in the stock market?
Trading for the lazy?
By investing long-term,you follow the principles of a trading strategy, based on the selection of shares of listed companies or other instruments. Then you keep the purchased assets in your wallet for years. Like an exemplary example of a long-term investor, Warren Buffet isgiven. His successes have been a model for the multitude of people interested in the stock exchange for years.
Adherence to a long deadline does not mean that you should disregard market analysis. It's just that your job will be to gather news of a different nature than those of day trading. From this it follows that passive investing attracts the attention of people who do not have adequate knowledge in a given field.
Investing in indices and diversifying.
When investing passively, you should diversify your portfolio by sensibly distributing the strength of risk across different instruments. This can be achieved, m.in, by giving up investing in individual shares of listed companies, and investing in indices reflecting the value of a specific number of selected instruments.
In this case, the index serving as a benchmark for investors allows you to limit the number of entries and the transaction costs associated with them. When investing in individual stock exchanges, various surprises can undermine their credibility. This reduces demand and generates losses.
In the case of ETFs, you invest your funds from a few to several dozen instruments important for a given industry, which means that the risk is distributed as a percentage of each of them. It should be noted that declines in a key company for a given index may result in a capital squeeze.
The availability of actively managed ETFs is very difficult. This is because they are quite a technical challenge. The difficulties associated with them concern arbitrage, i.e. speculation on closely interconnected instruments, where one of them is considered the main indicator.
ETFs can lead to a significant discrepancy between the share prices of listed companies and the prices of the indices based on them. This potentially leads to ideal arbitration terms. For example, the current price of ETF is lower than the share price of key companies on it. In this case, you could take advantage of this favorable opportunity by entering into a risk-free trade.
What about popular ETFs?
The popularization of ETFs has also occurred thanks to the coronavirus pandemic. It allowed investors to focus on investing in industries that are likely to survive the crisis, rather than choosing from company stocks. EtFs related to the medical, energy and automotive industries are the most popular. For example, tesla is considered one of the companies that in the future will have an increasingly strong position on the market.
Advantages and disadvantages of passive investing.
The advantages of passive investments are organic costs and the possibility of spending less time on daily analysis of instruments. If you are one of the people who do not have sufficient investment knowledge or the amount of your time is limited for various reasons (so that you can not afford to analyze the instruments on a daily daily), passive investing will be a kind of compromise for you.
The disadvantages of passive investing include a slow profit and a limited ability to reduce losses. The nature of this type of trading means that we copy the movements of an index associating specific companies, maintaining positions even when the stock market is heading in the opposite direction.
How much should you invest?
Most of us will probably say that several thousand zlotys is a really large sum. In the context of stock market investments, this is a harmful belief, because what counts on the market is not so much the size of capital as the amount of constantly achieved interest on it. Think carefully about what the stock market can offer you when you have ten thousand zlotys up your sleeve? What should you pay attention to when, against all odds, you want to become a long-term investor with a small budget?
Day trading, long-term investments.
Beginners approach long-term trading with great emotions. On the surface, this seems like a stress-free way to invest in the stock market. Still, holding a position for weeks or even years is only for people with the right means. In contrast, short-term trading is perceived in black colors. This is strange, because it is quite a reasonable option for someone who decides to learn how to play the stock market and build a budget for investments for a long time.
Dreams of becoming the next Warren Buffet take on stock market stereotypes. For example, some people can find
"In the stock market, people lose their money quickly."
Juxtaposing the stereotype with the real image of a trader on the stock market, if an investor loses his money very quickly, then probably, if he had the right experience, he would have to earn it instantly. That's not quite the case.
A long-term investor who regularly achieves a profit of up to 5% of the initial capital per year is a very good investor. The legend of the industry, i.e. Warren Buffet himself, earns about 12%.
If as a novice you invest 10,000 zlotys and the first year you reach 6% (this is a very optimistic approach), at the end of the year you will have 600 zlotys more.
Maybe 600 zlotys will be satisfactory for you, but practice will show you that the first years will allow you to go to zero. In this case, you will have to spend months or years exercising to finally earn a few hundred dollars.
We assume that you will invest PLN 10,000 and reach 3% every year. In this case, in 10 years you will earn 3500 zł, from which you will have to deduct tax and that every year. This looks very pessimistic. So we assume 6%. After 10 years of trading, you will accumulate almost PLN 8,000 gross, which will give you about PLN 6,000 net. Yes, in the stock market you have to think long-term. Did you know that if you were Warren Buffet and earning 12% in 50 years, you would earn over $2 million?
Do you know what will happen in 50 years? What will the economic system look like then? A predetermined 3% will allow you to make a profit of PLN 43,000 and 6% 184,000.
Now think about it. If you invested PLN 10,000 in day trading, with a profit of 3% per month, would you earn over 14,000 gross at 6% at 20,000, and at 12% 39,000 per year?
Based on these calculations, it can be concluded that without a much larger amount than 10,000, the stock market will only be worthy of treating as a hobby for you.
And if you still insist on long-term trading…
… having expectations about life from the stock exchange with a contribution of PLN 10,000, they will simply be detached from reality. If the stock market is your passion, then you can simply look at the shares of listed companies that have a good chance of surviving the coronavirus pandemic. Good industries for investment may be medicine, energy or Internet and traditional technologies. The most interesting opportunities may be among the cheap shares of companies on the stock exchange, bypassing market leaders.
A very interesting proposition may be trading involving the construction of wallets from cheap cryptocurrencies,having a lot of potential. However, keeping assets in a portfolio with little capital will result in a rather modest return.
More capital means more income.
There are rumors that Albert Einstein once said that compound interest is one of the greatest inventions of mankind. Perhaps this is the case, thanks to the snowball effect, which from a relatively small budget, can build serious capital for the game on the stock exchange. This opens up opportunities to turn your hobby into a serious source of income. But let's leave out the book definitions.
Many beginners wonder how much money it takes to fulfill their dreams of a life of trading or long-term investments.
Currently, trading requires a large own contribution. In the case of successful investments, part of the cash obtained can be used for further investments. If you really want to make a living from investment, speculation or Forex,you may need a capital of 200,000 zlotys. Playing on the stock market will allow you to gain valuable experience that you can then use to find investors. Patience also plays an important role in having a small budget. Fast earnings are also a greater risk. If you want to multiply financial resources very quickly, it is worth practicing a sober assessment of the situation.