Trading versus Investing

A Brief Introduction to Stock Investing

Stock investing, equities investing and investing in shares are three words that are often used synonymously.

Stock investing allows you to become an owner of a public company and provides the company with the equity capital to carry on or expand the business.

Benefits of Stock Investing

If the company in which you have invested prospers, common shareholders usually receive dividends. If they want capital gains, they can sell their shares for a profit.

Here are a few of the benefits of stock investing -:

  1. Potential for capital appreciation
  2. Dividends
  3. Voting privileges in the company
  4. Liquidity

Stock Investing Avenues

There are a lot of avenues open if you want to invest in stocks. You can opt to invest in the share market directly, or invest in a mutual fund.

If you decide to invest in stocks on your own, you will have to spend some time understanding what stocks are, and how the stock markets function.

The traditional method of investing in stocks is based on fundamental analysis. In this approach, the investor carefully evaluates the important financial parameters of a company, its growth potential, and so on before investing in its stocks.

Technical analysts rely on stock charts to make investment; this approach is also best suited for day traders.

Many discerning investors choose to couple fundamental analysis with technical analysis while making their stock investing decision.

Trading versus Investing - The Difference

Trading and investing are sometimes seen as one and the same thing, but in fact they are both very different aspects of financial trading that are cut from the same cloth, in terms of making money from the financial markets, but have very different methods. Yet, it is a common misconception that trading and investing are the same, where as in fact this could not be further from the truth as we will discover.

They Both Have The Same Ultimate Goal

First let's discuss the point of both trading and investing. The primary goal from both of these is to make money. This is the goal, pure and simple. How they both go about this is somewhat different. Investing however, usually takes a longer-term view, with potential profit that is usually very measured and based on fundamental data (see my article on fundamental analysis) and be involved in anything from the financial markets, to property, wine, art and more. Whereas trading is more speculative and 99% of the time short term and based heavily in the financial markets, the analysis is usually technical (see my article on technical analysis) and the potential profit although calculated is far from guaranteed and there is a far greater risk of loss.

What then could you say are the advantages of trading or investing? They both have many advantages and disadvantages. In fact, it has to be said, that it's good advice to have at least some form of long term, more secure and calculated investment regardless of whether you trade or not. You do not place all your eggs in one basket and hope that they all hatch to be golden egg laying fluffy things. Certainly with trading, the rewards are certainly there but as any trader new and old alike will attest, they are not without risk. Investing provides a measured, somewhat secured, longer-term financial gain, in markets that are very diverse and provide some degree at least, in the long term of protection against inflation and eventual financial gain overall.

Trading Is Not Investing

Trading really in a nutshell, is the method of using technical tools and other forms of analysis to judge a whether a price movement in the financial markets is likely to continue or change in its current direction and what if any is the best way to take advantage of that for your own profit. By using your skill and judgment, you will be able to assess the best point of entry, your exit and your projected profit from that. Most of the time trades are usually short term by nature and require a good amount of monitoring, adjustment and analysis to gauge whether the trade is on track for target, or reaching a point of acceptable loss based on the money management plan you have set. There is potential for very quick gain, in as much as there is potential there for equally quick loss. Nearly all trading is leveraged, meaning that the amount staked in a trade is geared heavily against small movements in the actual underlying market. Resulting in a small movement on the market, resulting on a larger movement positive or negative on the trading position taken.

Investing Is Not Trading

Investing usually 99% of the time, requires the need for a longer term view to remain positive in outcome, in other words, the investment needs to grow in value, regardless of what that investment is in. Whereas with trading, certainly within derivatives, it does not matter whether the market is going up (bullish) or going down (bearish), as you can buy into the market with the expectation of it going up in value (going long), or sell the market, with the expectation of it going down in value (going short). For traders, it's not about what they are trading ultimately, it's about finding a derivative which has a underlying that provides the opportunity to make a short term profit, regardless of whether it is going up or down in value. You can read other articles I have written about derivatives.

What it really comes down to is what is right for you. We are all of course very different; otherwise the World would be a very boring place, as we all know. Yet, when it comes to whether to trade, as we all should invest to a greater, rather than lesser degree. The option to trade really comes down to who you are as a person.

Whatever Is Right For You

Trading really is not for everyone, yet many believe they could do it. Certainly lately with the news showing traders making huge gains and subsequent losses, it does lead to the opinion that anyone could trade and do the former and hopefully not leave with the latter. In fact, personally, I do believe that some of these so-called 'professional traders' should not actually trade at all, simply because they do not have the mental makeup to trade. From experience of knowing and training younger traders over the years, it is these 'young guns' that worry me the most. As they tend to be attracted to the money, which we all are of course, but also, see trading as a lifestyle, which again it can be, but one in which these young guys (usually guys) tend to have a twisted inaccurate view of what a successful trader is. Their views are of the common misconceptions that traders wallow about in wine bars, getting drunk, running up huge bills and driving fast cars all over the place. Also acting in a similar 'gun ho' attitude to trading as well. I've always, always thought that anyone that is trading with other people's money, whether that's clients, banks or otherwise, should not be allowed to trade till they are 35. Till then, they trade virtually, learn the markets, do their analysis, learn, develop and are mentored and are paid a basic wage. Then at the age of 35, they are then allowed gradual, limited access to trading funds. I know this sounds really way out there and many would disagree with me. However, most of the trading mistakes and losses accounted for, I am sure are because of lack of skill, analysis, respect for the markets and maturity, which all come about with age and experience. The best traders that I have trained over the years, have always been over 50, are not trading with money that rely on and are more willing to learn, understand, develop and to long view. Women too, make exceptional traders, I know this for a fact.

I digress a little there, but the point that I was laboring is that there are some people that are more mentally adept at trading than others. It's not about intelligence, or what degrees you hold. No, it's your mental ability and makeup to deal with the view of trading as a business that it's not about immediate short term gain - it's about making sure your gains, overall, are greater than your losses. It's making sure that you continue to learn, develop and grow. That when you are not well, or stressed, you do not trade. It's about understanding yourself, as a person, your mental makeup. Are you someone that reacts calmly to bad situations? Are you someone that has an eye for detail? Are you someone that can see the big picture? Are you someone that either runs, or would like to run their own business? Are you someone that can be committed to something, even when it's not going his or her way?

There are many questions you should ask yourself as to whether you should look to learn to trade. Note that I say 'learn to trade' first. This is by far the first step that you should take. What I do find alarming, is the amount of people that come to me, after they have already started trading and are making losses. It's good that they have realized and of course they can be directed, usually my first bit of advice there, is to stop trading and learn first. If you are new to trading and want to learn more, you can learn a great deal from the ever increasing articles on this website. Do that first, open a demo account, learn, grow, develop and see if this is for you, way before you decide to put any of your hard earned money into trading for real.

A note to the wise: Trading in stocks can prove to be a highly satisfactory experience, if approached methodically. Many "rookie traders" have no business trading in stocks. The road to success is fraught with dangers, and there are many pitfalls. Trading in stocks is recommended only for those who have the financial strength to take the risks. Most importantly, serious stock investors must learn to avoid 'tips' and rumors while making their decision.

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