You might’ve been wondering what is the difference between Investing and Trading, or you might’ve been asking yourself: “Am I an Investor or a Trader?”, or you might’ve never even realized that there is a difference in the first place. In this article I will explain the difference between Investing and Trading.
The definition in it’s most basic form is:
“Investing is the attempt to make money over a LONG period of time”
“Trading is the attempt to make money over a SHORT period of time”
Now the question is: “How long is a LONG period of time, and how short is a SHORT period of time?” The answer is: “It’s up to you!”
What does this mean? It means that you might consider 6 months to be a long period to hold on to one stock, so you’ll call it Investing, and someone else might consider 6 months a very short period of time and they’ll call it Trading.
But for the sake of uniformity we’ll adopt the following rule:
“If the duration between opening and closing a transaction (i.e. buying and selling a security) can be measured in days or weeks then this is Trading, and if the duration can be measured in months or years then this is Investing“.
Usually Traders are only interested in looking at the price chart of a specific security or currency (usually Candlestick Chart), they look for identifiable patterns, or for areas of supply and demand to determine their entry point, and they do the same thing to determine their exit, they stay in one transaction for any duration between a day (or less) and a few weeks, they take a closer look at the market on a daily basis, to check whether their trade is still valid or if it’s time to close it.
To be a trader you need to be very familiar with technical analysis, as well as updated on market conditions, and upcoming events that might alter these conditions.
For instance if a company has it’s “quarterly earnings report” coming out in a couple of days, you might want to keep a close eye on that, either as an opportunity to enter a trade or maybe to close one that is already open.
Traders, can be either “Scalpers”, “Day Traders”, or “Swing Traders”.
Scalpers open and close a transaction very quickly, in a matter of seconds or max a few minutes, looking for small profits, but they execute dozens if not hundreds of such trades a day.
Day Traders hold on to their positions longer than Scalpers but they never keep any open trades for the next day, they close everything before the end of the day.
Swing Traders hold on to their positions for days or weeks.
Figuring out the type of trader you are is very important to your success. It’s very important to be honest with yourself, there is no good or bad style, it all depends on your personality, the style of trading you adopt must match with the type of personality you have, otherwise you’ll be living in conflict, and this can only be damaging to your trading account.
On the other hand Investors rely heavily on the fundamentals to decide to buy or not, and while Traders can make money in an UP or DOWN market, Investors can only make money when the price is going up, because an investor’s decision on whether to invest or not in company XYZ is based on the fact whether he believes that this company will grow and expand in the coming months or years. If so then he will buy shares in it.
So how do Investors decide on what company to buy shares in?
Like I previously mentioned, they rely on the fundamentals. What does this mean?
It means they read the financial statements that are released by this company (Quarterly and Yearly), and they try to find out as much as they can about the inside operations of this company, about it’s management, about their future plans, about their competitors. Basically they try to see how healthy the company is and if there’s room for growth. This is called Value Investing.
These are the kind of fundamentals that investors are interested in to assess a potential investment.
Investors don’t really care about the small daily fluctuations of the price, they believe that if a company has a high intrinsic value, then it’s share price will follow over the long run, so they try to buy the companies that have high value and selling at a bargain price.
I hope that this article clarified the difference between Investing and Trading.
On a personal note, I believe that every Wana-be-Trader or Investor should do a very thorough self assessment to find out exactly what kind he is, and what are his strong suites that will be critical in choosing his style.
For more information about Investing and Trading you can visit http://www.investment-education-diary.com
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