The internet is growing rapidly as the number of people using it continues growing. It is estimated that there are over 6 billion internet users internationally. As a result, the number of companies making money online has grown exponentially over the years. Think of companies like eBay, Amazon, and Uber.
Many people are also making money on the internet. Two of the most popular approaches they are doing this are by day trading and selling products online.
In this article, we will look at the key differences between day trading and e-commerce and the option you should select.
What is day trading?
Day trading is defined as a process where people buy and sell financial assets with the goal of making a profit. It differs from investing, which is a process where people buy and hold financial assets like stocks, commodities, and exchange-traded funds (ETFs).
There is a big difference between trading and investing. For example, when investing, people look at the fundamentals of the financial asset. In stocks, they look at a company’s earnings, management, and valuation. In day trading, most people focus on technical analysis and price action.
Second, day traders ensure that their trades are closed by the end of the business day to prevent major overnight shocks. Investors can hold their positions for years. Third, day traders tend to implement tens of trades per day. Instead, investors implement just a few trades per day.
Day trading can be highly profitable if things are going on well. In other periods, it can lead to substantial losses, which explains why most people lose money.
What is e-commerce?
E-commerce is a broad industry that involves selling goods and services through the internet. Some of the biggest players in e-commerce are companies like Amazon, eBay, and Alibaba. All these companies have popular platforms where people can buy products.
The e-commerce industry is extremely broad. For example, there are companies like Microsoft and Salesforce that sell software online. There are other people who drop-ship, which is a process of selling products online without having inventories. Instead, the e-commerce owner fulfills the products through another company.
E-commerce vs day trading
E-commerce differs from day trading in many ways. For example, it is a highly competitive industry that is hard to succeed. Competition is not a major issue in day trading. In fact, the industry does well when there are more participants because it leads to more liquidity.
Second, day trading is one of the top things that can make you money on the first day. On the other hand, it takes a few months before e-commerce people make money. In some cases, the process takes many years. For example, it took almost 15 years for Amazon to make a profit.
Third, margins in e-commerce tend to be small because of the competition and high costs of operations. Some of the top costs are inventories, marketing, staff, and taxes.
In day trading, there are minimal costs since you can do it using your smartphone. For example, if you have $1,000 and you make a $100 profit, you have just made a 10% profit margin.
Fourth, there are no warehousing costs in day trading. Most professional day traders work in their home offices or even in their bedrooms.
Further, you don’t need to make significant capital investments when starting out. Also, your success is not influenced by platforms like Google and Facebook.
Day trading vs e-commerce: time commitment
Another big difference between e-commerce and day trading is the time commitment. There are three main types of day traders. First, there are scalpers, who focus on opening tens or hundreds of trades per day. These ones spend over 10 hours trading.
Second, there are typical day traders, who focus on opening a few trades per day. These ones spend a few hours trading. Third, there are swing traders who open trades and then hold them for a few days. Again, these traders spend a few hours every day.
On the other hand, e-commerce can be a difficult thing since it requires more time. In many cases, e-commerce companies work on a daily basis since customers can place orders at any time. As such, depending on the size of the company, work-life balance is more difficult.
The other key thing to consider when thinking about e-commerce vs day trading is market volatility. A good example of this is what happened during the Covid-19 pandemic.
At the time, most e-commerce companies made a lot of money as demand rose. But these same companies struggled afterward as demand waned. This is because the hype in many areas has collapsed.
Many of them, like Wayfair and Stitchfix, were left with substantial levels of inventories. They were also affected by the supply chain issues that emerged after the pandemic.
Day traders love volatility and are typically not affected by these macro issues. For one, there are thousands of assets to trade.
While both day trading and ecommerce involve psychological factors, the specific challenges and demands on an individual’s psyche can vary significantly.
Traders and entrepreneurs should assess their own psychological strengths, preferences, and risk tolerance to determine which path aligns best with their personality and goals.
The psychological factors involved in day trading and ecommerce differ in several ways. Here are the key differences:
- Decision-Making Speed: Day trading requires quick decision-making due to the fast-paced nature of the financial markets. Traders need to analyze market data, identify opportunities, and execute trades promptly. This can create a higher pressure environment that demands rapid decision-making. In contrast, ecommerce typically involves longer-term planning and decision-making processes, such as product selection, inventory management, and marketing strategies. The time horizon for decision-making in ecommerce is usually more extended compared to day trading.
- Risk Perception: Day trading often involves more immediate and tangible risks. Traders face the possibility of significant financial gains or losses within short timeframes. The volatility of financial markets can create an environment where risks are felt more acutely. In ecommerce, the risks are typically spread over a more extended period. While there are risks involved, such as inventory management and competition, they are often perceived differently due to the longer-term nature of the business.
- Emotional Response: Day trading can evoke strong emotions due to the potential for quick and substantial financial gains or losses. Traders may experience excitement, fear, or frustration within short timeframes. Managing these emotions is critical to making rational decisions. Ecommerce, on the other hand, may evoke a different set of emotions, such as the anticipation of launching a new product, the satisfaction of building a brand, or the challenges of managing customer relationships. The emotional responses in ecommerce are typically spread out over a longer period.
- Feedback and Validation: Day trading provides more immediate feedback on trading decisions. Traders can quickly assess the success or failure of a trade, which can impact their confidence and decision-making in real-time. In ecommerce, feedback and validation may take longer to manifest. The success of an ecommerce business may require months or even years to fully assess, making it important for entrepreneurs to maintain long-term motivation and perseverance.
- Skill Development: Day trading requires specific technical skills, such as chart analysis, technical indicators, and risk management techniques. Traders need to continuously develop and refine these skills to stay competitive. Ecommerce, on the other hand, involves a broader range of skills, including product sourcing, marketing, customer service, and logistics. While there are overlaps in certain areas (e.g., risk management), the skill sets required for success in day trading and ecommerce differ in their focus and depth.
Risks for day trading and e-commerce
Day trading risks
Day trading has many risks, which you need to know about. First, there is the risk of huge drawdowns when a trade goes against you. For example, if you buy a stock at $20 and it drops to $10, it means that you have just lost 50% of your funds. If you are using leverage, your losses are much higher.
Second, the learning curve is usually much longer. In many cases, it can take many months for you to master the process and become profitable. This was common with e-commerce until some time ago. However, today with tools like Shopify it is much easier to start your own online sales business.
Third, there is the platform risk, especially when you are trading cryptocurrencies. A good example of this is what happened in November 2022 when FTX collapsed.
Fourth, there is the risk of losing more money than your account balance. This happens when you are using leverage. Leverage is defined as a situation where the broker extends you some credit that you can use to day trade.
While day trading has its risks, We believe that e-commerce is a riskier way to make money. Some of the most notable risks to consider are:
- Google algorithm risks – Many e-commerce companies use SEO to attract customers. The challenge is that Google’s algorithm changes could impact your company.
- Competition risks – There are significant competition risks that could impact your company. For example, we have seen many e-commerce companies get disrupted.
- Labor costs – Most e-commerce companies require numerous people to work. In some instances, managing labor costs can be tough.
- Geopolitics – At times, geopolitical risks such as the Russian war in Ukraine can lead to major disruptions.
Other e-commerce risks are expensive marketing costs, supplier issues, cybersecurity risks, and poor ratings and review risks.
After assessing the pros and cons of e-commerce and day trading, we believe that day trading is a better option to make money online.
It has more advantages, including huge margin potential and risk management tools like a stop-loss and a take-profit. These tools will help you minimize your risks. Day trading is also highly flexible and is not affected by external factors.
External useful resources
- Would you recommend ecommerce or Day Trading for short term financial gain? Quora