There is a vast difference between investing in stocks and trading in shares. Yet, many people often misconstrue the difference between the two. In this article, I intend to clear the differences between both constructs to shine a clear distinction between both techniques to help individuals understand the varying differences. Most importantly, let people know what they are doing.
I like how Andrea Coombes defines trading where she says individuals trade to get “short-term profits,” These individuals focus on a company’s short term spike in that they want to see how they can get returns within days even seconds.
Stock trading involves the intention to select a stock, purchase that particular stock, and eventually sell them to make a profit. In addition to that intention, the timing to buy and sell is crucial. In stock trading, there is the window where these things occur, and the intentional stock trader must be on top of these processes to ensure that they don’t miss the opportunity to buy and sell.
On the other hand, stock investment involves an individual looking to gain specifically from a company’s long-term plans, checking out the company’s potential to give returns over a long time and, of course, giving the individual a secure investment window.
Paul Mladjenovic, in his book, Stock Investing For Dummies, admonishes investors to have a long term goal, and they should ask themselves what the long term goal for investing is. For example, an investor in this particular spectrum thinks of things like I want to use these sets of stocks for my child’s university in ten years, and I want to buy my dream family house in six years.
Warren Richmond highlights various types of trading in his book, Stock Trading: Strategies to Make Money with Stock Trading. For simplicity, I will mention them here briefly.
The first one on the list is Day trading, which means buying and selling stocks within a day. It entails closely monitoring the prices of securities throughout the day and being able to make buying and selling decisions within twenty-four hours. That’s what traders on the floors do. They can churn out “buys” and make an immediate return within the close of business.
The second one is called scalping. With this, you have to spread your risk by buying a substantial amount of securities to make a little profit on each trade made. You take advantage of what is called the bid-ask spread. Scalpers usually want to make many small profits as possible, without letting them evaporate.
Swing trading is another type of trading where the trader invests mostly in the volatility of the market. They buy and sell in these conditions to make a return from the instability of the shares market. These types of traders usually use technical analysis for their trading purposes.
Position trading is where the trader studies existing market charts and use the findings from these outcomes to making trading decisions. Richmond describes these types of traders as surfers who ride any wave the market presents with the hope that they can make the right decision in their buying and selling strategy.
Find what works for you. It is also essential that when you decide to do any trading for the individual to carry out extensive research about this area. They all have their disadvantages and advantages.
In comparison to stock investing, there is no particular description of how to invest in companies. In stock investing, I would usually follow the advice of long-term players like Warren Buffet and Charlie Munger, who always advise us to find much about the company one wants to invest in and keep that particular stock for a long time.
However, if you’re not sure about what stock to buy, it’s advisable to use a reputable broker to help you invest. Before you do this, ask yourself, would you like someone to help control your finance, and are you happy for the person to control how you spend your future investment. It would be best if you carried out your due diligence before you pick the right broker.
Let’s assume that your friend runs an ice-cream store in the corner of your bus stop. He continuously increases his traffic, and you can notice that people always want your friend’s ice cream. His demands are out of this world. Your friend finds out that the only option for him is to spread his tent to other areas. He approaches you to invest in his company, shows you his books and potentials for profit growth. You look into his books and find out that what he has done before now and what he intends to do—albeit long—might give you about ten percent return. Pouring some money into his business, therefore, is investing. You are investing to make some returns on investment. However, you are also banking on the business’s success and the profits you will get on a yearly period.
You also, as an investor, want to get dividends from your investment. For long-term investors, there is a need for them to ensure that their investment lays continuous eggs yearly. I like to invest in companies that give high yearly dividends while they continue to grow their business offerings and services. There are tools that serious investors can use to target companies that provide annual high dividend returns. I have been fiddling with Top Dividends to help make the right decision when picking stocks that will guarantee high returns.
Quite often, I get the question of whether it’s good to invest in stocks or follow the trading route.
To answer in simple terms, it depends on your risk appetite and what your goals are.
I don’t do the short term game when it comes to investment. I don’t have that psychological strength to deal with the daily grind of checking what the charts or graphs of a particular security are saying. I don’t have, mostly, the balls to be on the computer for twenty-four hours monitoring one specific stock with the hope that there is a quick window for me to buy and sell.
I am quite an old school type. I want to plant the seed of investment and watch it grow. I follow the compound interest route, where your initial investment grows slowly and gradually over some time. That way, my risk level is dropped to the minimum, and I can do other things during the day.
I am not disregarding those who enjoy trading as their form of investing. I have done a little bit of self-searching, and I have found out that the long term strategy works for me. As such, each individual must find out what works for them.
Richmond opines that traders should find a strategy they must use in trading. He argues that traders will lose their investments without the right plan and further asserts that it will help the trader to come out with their head clean without any bashing from the rough waves in the market.
Trading, from all indications, seems to be a game played by individuals with high-risk thresholds.
I have heard of a story where a woman involved in the day trading, selling, and buying within minutes and making about three hundred percent return within the day. She uses algorithms and other tools to help her make informed decisions. Her portfolio is robust. This same lady in this bracket has lost a series of trades because of the wide swing of the market, but she was able to cover the loss because she had a widespread of buys in the market.
If you’re going into trading you have to have a defined plan and the style you want to use when you are going to buy and sell. Most novices in stumble into trading and expect that they would get quick returns or follow the advice of one guru without actually doing their work. When you don’t have your defined plan or rush into trading, you are setting yourself up for failure. Daily, novices who have not done their research who throw their money on securities usually lose ninety percent of their investment. Again gauge your risk tolerance. I must repeat this over and over again. If you can’t handle the wild swings of the market, don’t do it.
If you are like me and want to secure your money, you should consider investing. Invest in blue stock companies—companies that are known for their reputable and financially sound businesses. And when investing, ensure that you do your homework. Imagine, investing in a company like Amazon when it first entered the market, imagine what your stock will be worth now. For investors, you want to think in five years and ten years period. Charlie Munger says buy companies that you can hold for a long time, and another advice he gives is never to sell. I think that will do it for me.
The question you should be asking yourself now is, what is my risk appetite? What are my plans for the future? Why am I investing? In answering these questions, you would be able to find out what you want to do. You would be able to find out if you’re going to slay dragons in the trading space or win by taking wise and slow calculated steps.
Investing and trading are used interchangeably. They are, as I have described differently, different in terms of approach and results. While one bank on the buy and hold strategy, the other focuses mainly on the short-term. And, as always, the individual must gauge their risk appetite