Attempting to profit from trading stocks might seem like a surefire way to get rich quickly, but it is not at all what it's cracked up to be. For starters, the odds are stacked heavily against you. And even if you get lucky once or twice, winning consistently is extremely difficult.
Day trading is really just gambling, which is something you do not want to do with your life savings. If you're thinking about day trading, do this instead.
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Invest for the long haul
With many Americans out of work and stuck at home last year, there was a surge in activity on popular trading apps like Robinhood to try to make ends meet and hit it big. The impressive rise of the S&P 500 since March 2020 creates a fear of missing out when people see friends and family members constantly discussing the markets and even finding some success, and they want in on the action.
However, trying to time the stock market, get in and out of trades quickly, and do so consistently over time is a losing proposition. You're competing against some of the best and brightest firms on Wall Street, which have massive research and technological advantages over retail investors. In addition to the disadvantage from a tax perspective, day trading also requires a substantial time commitment and comes with a heavy emotional burden.
A proven strategy instead is to buy and hold stocks for the long term. Consider this: If you started with $10,000 in an S&P 500 index fund and added $5,000 to your investment every year for 20 years, you'd have nearly $335,000. (This assumes the market rises at a compound annual return of 9% per year.)
One of my favorite sayings when it comes to stock market investing is, "Time in the market beats timing the market." Always keep this in mind.
Consider these stocks
If you want to try your hand at picking individual stocks, take a prudent approach. A good first step is to take a look at some of these high-quality large-cap stocks, all of which possess strong competitive advantages and can provide a good foundation to your portfolio.
- Etsy (ETSY 0.49%) is a leading online marketplace for unique, handcrafted goods that currently has 4.7 million sellers and nearly 90.7 million buyers on its platform. The business, which operates in seven different markets, is still benefiting greatly from a pandemic-fueled boost. Sales (up 142%) and profit (up 1,048%) skyrocketed in the most recent quarter. As consumers continue to shift their spending toward e-commerce, expect Etsy to keep shining.
- With nearly 400 million active accounts, PayPal (PYPL -1.14%) processed a whopping $285 billion in transactions in Q1 2021. The digital payments pioneer, supported by powerful network effects between its merchants and consumers, still has a long runway for growth. CEO Dan Schulman has set 1 billion active daily accounts as PayPal's goal. With an innovative culture that releases new products often (such as QR code payments and cryptocurrency capabilities), coupled with the secular tailwind of society moving away from cash, PayPal is a stock to seriously consider.
- Although Starbucks (SBUX -1.02%) has close to 33,000 stores today, management believes that by 2030, the Seattle-based company will have 55,000 locations globally by 2030. Leaning heavily on technology initiatives made to bolster its digital capabilities, the business has a world-class rewards program that compels customers to visit often and spend more. For millions of people across the world, Starbucks is ingrained in their daily lives, making it a safe investment for your portfolio.
Think twice before you decide to dabble in day trading. You're better off investing in quality businesses for the long haul.
