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Day Trading versus Mutual Funds

Stock Market Tips For New Traders

Day trading versus mutual funds. Two very different ways of investing money. Which one is better will depend on each individual and their knowledge of the financial market and their comfort level with investing.

The first difference has to do with the level of risk involved. Mutual funds offer a variety of different choices in terms of how aggressive you want to be, but even the most aggressive of funds is safer than day trading, especially if you are financially secure enough to wait out a period of low returns.

Mutual funds produce security by being invested in several companies, rather than putting all your money in a single fund. Therefore, even if one or a couple of the companies have financial difficulties, the performance of the other companies can keep your investment from dropping too low.

With day trading, everything will depend on the one company that your money is invested in. If the company does well, you earn a profit; if the stock goes down, you take a loss. Day traders can average out, however, by working with smaller amounts of money and buying and selling numerous times over the day. Therefore, you could have a bad morning but if you have a successful afternoon then you may end up with a profit regardless of how the beginning of the day went.

With mutual funds, however, there is more of a guarantee that you will see a significant return on your investment if you are able to wait out the low periods. Typically a long-term investment of 10 years or more will give you an average of a 10% annual return on your money. With day trading, there are no guarantees whatsoever, or even a standard estimate. In fact, if you do not have the right equipment and experience, day trading can be little more than gambling.

Depending on the market, the advantage that day trading can give you is an immediate return on your investment. During the dot-com boom, successful day traders were making a great deal of money right away. Mutual funds, which chose the safer, more long-term approach did not do so well during that time period.

However, when the bubble burst on the dot-com era, many day traders were wiped out financially. Some went bankrupt while others merely lost whatever gains they had made during the market’s up period. A similar thing occurred with the recent crash of the financial markets, where again many day traders were unable to keep up with the volatility of the market and incredible amounts of money were lost.

The real thing that day trading has going for it is control and allure. There is nothing particularly exciting about mutual funds. You hand your money over to a financial manager who invests the money for you, and then you wait. You can move your money into more aggressive funds but to see any significant return on your investment you’ll be waiting for years.

Day trading involves the excitement of making money from money immediately, and doing it yourself. If you have the skills and the mindset for this type of investment then you may enjoy it. Basically, mutual funds offer a safe way to manage your money, whereas with day trading anything could happen.

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