Investment Strategies: Trading

Trading (also known as day trading) is where you buy shares or assets and try to sell them for a profit in the short-term. The idea is to make a certain amount of money off many different trades. It requires a lot of time and effort.

There are three main problems with trading as an investment strategy:

• Costs
  Every time you trade it costs you money. You pay broker fees and get hit by the buy/sell spread (the difference in prices paid and received). The more you trade, the more money it costs you. You have to make up these costs before you make a profit on your trading.
• Competition
  When you trade, you are going up against professional traders. At the very least they have been selected from the best applicants, have huge research budgets and teams, are able to get information you don’t have access to, and trade 15 hours a day every day. It’s fairly unlikely that you are going to have an edge on these people.
• Time
  Trading requires you to be following the market all the time, waiting for the perfect time to buy or sell. You will spend a huge amount of time on this strategy.

For the three reasons above I am not interested in trading. I prefer to spend less time thinking about my investments, and don’t believe I would have any kind of edge.

Luckily there are other strategies that have higher odds of success. We’ll look at the next one, value investing, next.