What is the difference between trading and investing? I explain in simple terms
In fact, there is a big difference between traders and investors. I’ll try to explain it in simple terms.
This article represents my personal opinion and nothing more. I would be glad to hear your opinion in the comments. But please be respectful of your opponents!
In short, trading is short-term trading in stocks, while investing is buying stocks for the long term. History knows both famous traders (for example, Larry Williams) and investors (Warren Buffett).
I could not find well-known traders who made a fortune only by trading in the Forbes list. But Warren Buffett has been investing all his life and is one of the richest people on the planet.
Differences between trading and investing
Traders (also called speculators) rely on technical analysis in their work. They constantly monitor the chart and look for signals to buy or sell using various technical indicators and tricks. The goal of a trader is to capitalize on the difference between buying and selling.
Traders can make dozens and hundreds of transactions per day. Of course, not all of them end in profit. At the same time, for each transaction, the trader (as well as the investor) pays a commission to the broker. Due to the large number of transactions, a large commission also accumulates.
Traders often use leverage (borrowed funds) to increase profits. But it also increases losses up to zeroing the trader’s trading account.
Another feature of traders is the opening of short positions (shorts). This means that they are selling non-existent securities, which they are obliged to buy back later. This technique is used if the trader is sure that the stock price will fall.
I would compare trading to a roller coaster. Today you can make good money, but tomorrow you can lose just as well. I used to trade forex. Tried to understand everything, read literature. But it was not possible to achieve success and I finally went into investments.
Investors, unlike traders, do not use technical, but fundamental analysis of the company’s shares. This means that they evaluate the company as a business.
They study financial indicators, such as profit, business profitability, share capital, debt load, etc. All the necessary information is in the company reports.
This does not mean that investors do not need charts. The stock price displayed on the chart is very important. According to it, various indicators are considered – multipliers that indicate whether a stock is overvalued or undervalued.
I begin any analysis of a stock with a review of the chart for many years. This gives me an idea of whether the stock is at its low or its high. Then I turn to the analysis of the financial condition.
At first glance, this seems complicated. For many years I myself was afraid of this phrase – fundamental analysis. But now I understand that it gives the most accurate information about what you pay money for.
If I compared trading to a roller coaster, then I would compare investing to a quiet trip on a yacht on a calm ocean. However, storms do happen. And in order to overcome them with minimal losses, you need to learn how to invest.
Investing and trading are fundamentally different, but they have one thing in common: the need to learn what you do.
Trading is able to show faster and more noticeable results, but the risk of losing everything is great. Many successful traders sooner or later become investors.
Investing is a calm and boring activity for some. But they allow you to achieve relatively stable results over a long period of time. And Warren Buffett is a prime example.