Trading vs Investing

Why aren’t you making money?

There are two ways to make money off the stock market: trading and investing. Both can yield significant returns, but is one better than the other?

Both sides have their supporters who wax poetic about the advantages of the system they’ve used to make money. Trading and investing are legitimate ways to make your money, but it is your individual temperament and psychology that will determine which method is right for you.

TRADING

Trading is the classic “buy low, sell high” method of investing.

You’re continuously making trades as the prices of the stocks fluctuate throughout the day. You buy stocks anticipating that someone else will buy it from you later at a higher price

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Traders have a reputation for being impulsive and spontaneous. While you do have a certain “love for the game” to succeed in a trading environment, that characterization isn’t entirely true. Irresponsibility doesn’t get you far in any endeavor.

Here are a few of the traits of highly successful traders.

1. Contrarianism

A successful trader must be a contrarian. It will be hard to stand out if you swim in the same direction as everyone else. Wealthy trader Paul Tudor Jones is an advocate of contrarian investing. He buys and sells stocks in contrast to that of the crowd.

2. An analytical nature

Someone like Nassim Taleb, author of the Black Swan, uses analytics to inform his trading decisions. In fact, Taleb credits his financial wealth and independence due to his understanding of the mismatch between statistical distributions used in finance and reality.

3. Calmness & Discipline

With the trading market moving at an extremely fast pace, a successful trader needs to be able to slow down and keep perspective. You need to get yourself out of bad situations when they arise. The only way to do that is to take a step back and figure out where you are. Have mental stops, price stops and even time stops to keep you in line.
It takes someone with a certain fortitude to get on the front lines and start wheeling and dealing. These guys are the quarterbacks of the financial world. It can be hectic and not for everyone.

INVESTING

Investing is different from trading. Whereas trading is like a fast-paced arcade game, investing is more like the GTA series, an open sandbox game that can take months to properly finish.

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The goal of investing is to gradually build one’s wealth over a long period of time. As such, there are certain traits that many successful investors embody. These are:

1. Knowing your limits

Invest in what you know. That is superstar investor Peter Lynch’s mantra. When you focus on growing your strengths and expertise, you give yourself the best chance to make money investing. If you’ve never heard of options, then it probably doesn’t make sense to base your entire investment strategy around using them!

2. Patience

Successful investors are incredibly patient. Warren Buffet has often said that his success comes down to all the businesses he didn’t invest in, rather than the one’s he didn’t.

He likened the practice of making an investment to a baseball game. The market sends you pitches all day long, and all you need to do is wait for the “home run ball”. Wait for a great opportunity to come around and do your due diligence, rather than simply jumping in for the sake of it.

3. Willingness to learn

Buffet and his long-time partner, Charlie Munger, are both voracious readers. The Omaha Oracle often points to his habit of reading 500 pages a day as the key to his incredible success.

It’s not just a passion for learning about fundamental analysis, or reading through company financials that sets successful investors apart from the others. It’s also a willingness to learn from one’s own mistakes that separates the wheat from the chaff. Analyse your mistakes, and learn from them.

Commonly, the investor is the calm, cool headed person who weighs all his options before finally making a decision. The rewards of this decision won’t be tangible right away but the investor puts in motion a series of events that will bear fruit over time.

So, are you a trader or an investor?

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3 responses to “Trading vs Investing”

  1. Rishika says:

    your chances of making money and avoiding huge losses are better with a long-term investment strategy rather than a trading approach. Even if all you do is put money into a unit trust or index fund every month, reinvest your dividends, and leave your money in the market for the long term, you’ll almost certainly earn a decent return. Trading is a lot more risky, and you can lose more money than you actually have. trading is usually more expensive, because every time you buy or sell stocks you pay certain fees. If you’re an active trader, those fees can add up, and your returns therefore need to be very high to make up for your costs. In contrast, since you do less buying and selling as an investor, your returns can be a little lower because you have lower costs.

  2. Savannah McNeil says:

    Thank you for such a great article.
    Hi there. My name is Savannah. I’ve been trading for 3 years now for Forex and Binary options. I was wondering if I can start my own business in this sphere. I came across on the website http://www.newbroker.info/. Guys are offering their services for Forex and Binary at quite affordable and attractive prices. Only for $5 000 you can start your business. No jokes, for $5 000 you’ll be served by the means needed to start up – company registration, website development, provision of a platform, payment system connection! High quality and free quotes data feeds comes from the major brokers. It’s provided absolutely free with the purchase of their platform + you don’t need a technical specialist in the startup stage in your company, all the work on installation and support, they will do for you. So, for now, I would definitely choose New Broker to start up.

  3. Parinitee says:

    Trading can be thought of like running a business. It is understood that you put your capital at high risk and as a result expect a larger return than you would for investing.