Are you new to the idea of the Stock Market but you want to learn how to make money from it? Before putting that Precious Money on the stock market, the first thing you need to know is whether are you going to be Trading or Investing.
Trading and Investing both involve Seeking Profit in the stock market, but they pursue that goal in different ways. Some people act like an investor but expects earnings like a trader or vice versa. Don’t mix it up because you might get disappointed with your Return-On-Investment (ROI). Know the difference between trading and investing to decide your buy and sell decisions.
#1 The difference on Time-Goal Horizon
Investing is NOT a “Quick-Money or Get-Rich-Program”. Investing means “Buy and Hold” or buying stocks and keeping them on a medium-term or long-term time horizon.
Medium-term refers to investments you keep between 3-10 years while Long-term are kept for more than 10 years.
The goal of investing is to gradually build wealth. When people invest, they just let it grow on its own and do not worry much about the daily ups and downs of the stock market prices. An investor, therefore, does not daily monitor the stock market, instead, he will occasionally read business news. Transactions are seldom, which can be top-ups once a year or minimal withdrawals (Earnings or Interests (Dividends) only).
Investments are wealth that you prepare for long-term future needs like college education of your child, retirement, or buying a property for investment purposes.
Trading as the term implies means “Buy and Sell” often. It’s buying stocks and selling them in a short period of time. Trading is popular because many people talk about this of “Quick-Money or Get-Rich-Program” but what you don’t know is that it can also be a “Quick-Loss or Get-Poor-Program”. This has the possibility of earning very high but can have a higher risk of losing your money too in a very short time.
Because stock market prices change quickly, traders can spend hours a day monitoring their investments. Transactions are frequent. Traders expect income in a short period of time so they would therefore make strategies to offset losses and reinvest.
Traders generally fall into one of four categories:
- Position Trader: Stocks are held from months to years.
- Swing Trader: Stocks are held from days to weeks.
- Day Trader: Stocks are held throughout the day only
- Scalp Trader: Stocks are held for seconds to minutes
Why is this important?
Knowing the difference between Trading and Investing time horizon is important to manage when you should get income from your investment. It will also help you set your goals and expectations on how your money grows. Of course, we all want to earn quickly but ask yourself, do you have the time to research and monitor the stock market?
#2 Difference on Approach
Another difference between Trading and Investing is that it considers different factors, analysis, and strategies to buy and sell. Traders use technical analysis whereas investors use fundamental analysis.
Trading basically involves analyzing market trends. The goal is to buy at a low price and sell at a higher price or at least offset quickly in a short time. Traders use charts and graphs representing the price movements, buyer and seller volumes, and time of trades. Stock trading companies, banks, or investment institutions provide these reports online.
List of investment companies, banks, and websites where you can register and learn about these charts, graphs, and reports for your future trading ventures:
Investing focuses on the company’s financial reports, analysis of the industry in which the company fits in, and the general macroeconomic situation in the country. In general, the prices cannot be predicted because many risks and factors are involved.
#3 Common Investing Strategies
- Value Investing – This involves finding companies that are trading for less than they currently are worth or stocks that are undervalued.
- Growth Investing – Means determining the companies that you believe will grow in the near future.
- Blue Chip Investing – Involves selecting companies which are already well established, stable income, and belongs to the top companies in a country or in an industry.
Why is this important?
This is important because this will help you determine which company you need to invest in based on your strategy, analysis, or factors you consider. Are you going to invest in a small company because of its future growth or are you betting your money in a small company because of buyer and seller flow?
#4 Risks Involved Between Trading & Investing
Basically, all investments have risks involved in it. The only difference between the risks of trading vs. investing is the level or amount of risks that the individual wishes to take. Trading can give you more profit in a short period of time but you will also have to bear a higher level of risk.
Here are some risks that are involved:
Market/Price Risk – This is the possibility for an investor to experience losses due to changes in the market prices of securities. It is the exposure to the uncertain market value of a portfolio due to price fluctuations. Trading is more vulnerable to this because traders rely on the daily valuing of the stocks.
Liquidity Risk – This is the possibility for an investor to experience losses due to the inability to sell or convert assets into cash immediately or in instances where conversion to cash is possible but at a loss. Investing involved long-term placements of money, therefore, is no need to withdraw or convert to cash immediately. In the case of trading, this is another major concern because traders need to withdraw and reinvest quickly.
Country Risk – This is the possibility for an investor to experience losses arising from investments in securities issued by/in foreign countries due to the political, economic, and social structures of such countries. There are risks in foreign investments due to the possible internal and external conflicts, currency devaluations, foreign ownership limitations, and tax increases of the foreign country involved which are difficult to predict but must be taken into account in making such investments.
Foreign Exchange Risk – This is the possibility for an investor to experience losses due to fluctuations in foreign exchange rates. The exchange rates depend upon a variety of global and local factors such as interest rates, economic performance, and political developments.
#5 Risk Levels
Trading means exposing your money to high-risk to medium-risk stocks or companies. Investors invest in low-risk companies.
- High Risk – are smaller companies or newly established companies which may or may not have potential for growth but prices can go high because of market trends.
- Medium Risk – are well known companies with steady income but don’t belong to the top of the industries. They usually have the potential for higher growth.
- Low Risk – are big and well companies with steady income and under good management. These companies usually have capitalization in billions. It could also mean that these companies belong to the top of their industries.
Why is it important?
Risk is the most important factor you need to consider before investing or trading because you can lose your money in the stock market. Managing risks will help you lessen the chance of going bankrupt. Knowing what risks you are exposed to and the level of risks should determine what attitude you should give towards an investment. If you know it is risky and you took it, don’t dwell and be depressed if you lose.
Conclusion
- Determine if you are keeping the investment for long term or short term so you can manage how frequent you will check on stock prices and how often you will do your research.
- Determine what risk you are willing to take before deciding if you will trade a stock or invest in a company
- Determine how much money you are willing to invest for a long time and how much you are willing to loose in trading
- Assess yourself as to what kind of investor attitude you have.
Take this Risk test to know what kind of investor you are, it’s free
