On one hand, we have the people that are known as “Day Traders”, who are actively buying and selling items in their portfolio throughout the day and closing out their position (in cash) when they retire for the evening.
These traders are extremely involved and need to be aware of everything to do with the items they are dealing with, the regulatory environments surrounding them, and much more. To put it simply, these types of investors have literally made it their business to know everything going on in the investment landscape.
On the other hand, you have buy-and-hold investors. The best example of this investment philosophy is Warren Buffet, a man who values time above all else. Buy-and-hold investors perform extensive research into companies and find ones that are either undervalued or show a lot of growth potential.
These investors are comfortable making picks that will stay in their portfolio for months or years, only selling off their ownership when something changes in their evaluation. This is a much slower-paced, less intensive way of getting into investing.
Where Did Day Trading Originate?
Day trading has been around longer than most of today’s companies, originating in 1867 following the invention of the telegraph. It was at this time that stock markets created “ticker tape“, shortening company names to the “ticker symbols” or “tickers” that we know them by now. If you’re unfamiliar with a ticker, this is usually a 3-5 digit identifier for a company on a stock exchange. For example, Tesla is traded on the NASDAQ under the ticker symbol TSLA.
When ticker tape emerged, it allowed investors to view real-time information about the status of a stock, showing whether it had gone up or down in value. These investors then put buy or sell orders in through their brokers, effectively allowing them to “day trade” the stock.
Fast forward 100+ years and one stock market crash later to 1997, where the fundamental way of trading had changed. What began with the telegraph moved to the telephone, then moved to the internet. Online platforms such as E-trade were formed and every ‘average Joe’ investor had access to the markets. With Dot Com era optimism rampant in finance and public equity, this was considered a turning point for the stock market; however, day trading had a very negative connotation around this time. Most “day traders” were looked at with disdain or pity, as it was reported that, at the time, “7/10 day traders lose everything” from the North American Securities Administrators Association.
It turns out, it took one more market crash for day trading to reach the point that it’s at today.
Modern Day Trading
Investment banking is one of the most idealized professions in the world, with most individuals associating a stockbroker or day-trader with expensive cars, luxurious lifestyles, and piles of cash. The reality, however, is much different. In 2020, day-traders are typically tech-minded folk in front of computer screens analyzing financial and social trends to try to understand and capitalize upon patterns.
Day-traders use algorithmic data to understand trends based on financial fundamentals; for example, a day-trader may see a stock that is typically valued between $12 and $13, therefore, when it is at $12, they will purchase it, and when it reaches $13, they will sell it. They also look for inefficiencies in stock charts and capitalize on these changes. Instead of purchasing stocks when they are worth next-to-nothing and selling when they are huge companies, they simply analyze the market and make real-time decisions based on their data.
Buy-and-Hold Investing
Buy-and-hold investors are long-term investors with a much more simple philosophy.
If they believe in a company, they will purchase their stock. If that belief changes for any reason, they will sell the stock. While there are much more nuanced decisions that go into this, buying what you believe in is their base philosophy.
Warren Buffet is a man of frugality and patience who embodies value-based investing for many followers. Buffet looks to companies that he believes are undervalued, rife with potential, or otherwise poised for success in the future. This method of investing is much more passive than day-trading and at times, involves holding investments for months, years, decades, or longer, based on what you believe will happen in the world.
With buy-and-hold investing, much more emphasis is put on the company behind the stock, rather than what is happening in the market on a given day. This method involves extensive company research, due diligence, and the wherewithal to ‘put your money where your mouth is’.