Trading and investing have been used synonymously for far too long, and it’s time to put a clear distinction between the two. Even investors themselves often don’t know the proper definitions of trading versus investing, and these are usually people who rarely make any money on the stock market. Before you can make a profit from trading, investing, and the market, you must understand that the fundamental difference between the two is your intention, i.e. what exactly are you looking to do with your capital?
Investing has been around since the beginning of time. Investors supply capital (necessary cash) to help a business, which makes the investor a partial owner of that business. With large scale investing on the global stock markets, the investor gets company shares, for whichever company he/she chooses. Obviously the act of investing is the belief that the company will grow and make a profit, and, in turn, make some profit for the investor as well.
However, unlike trading, investing is long term. What does this mean? Generally, the answer is at least one year and often longer. Daily market fluctuations are overlooked by the long-term investor, and a few percent increase or decrease in your stock price is of no concern. Investing is usually done into a company that one has researched thoroughly and partly treats as his/her own. Much like an entrepreneur takes care of his own business, an investor takes care of his/her investment.
Trading versus investing, though, is a completely different thing. Trading stocks is usually done over a short period of time, which could last anywhere from one day to six months. A trader, as opposed to an investor, looks for stocks solely for the purpose of seeing them grow quickly by a few percent and sell as soon as that happens. The way traders make money is usually through the knowledge of fundamental analysis to profit and the technical analysis of the stock.
Sometimes with trading the shares are bought several times, i.e. they are sold for profit, but if they go down in price, they are bought again. Traders make money only from short-term fluctuations in the market, unlike investors who are looking for a long-term steady increase. In the end, traders are probably risking less capital and see results of their activities a lot faster, so this is suitable if you’re impatient!
The bottom line is that whether it is trading or investing that is right for you depends solely on your personality and comfort level. You must also work out a strategy that works only for you, rather than blindly follow the latest hot tips and ‘guru’ advice.
