People have been investing since the beginning of time. When one is investing, the “investor” provides cash (capital) to help a business. The business, in turn, gives the investor an ownership interest in the business. When we talk about stocks and companies, this investment results in the investor receiving shares of the company. When one invests in a company, one expects that the company will grow well and be prosperous, which will result in the investor earning a profit on his investment.
There are a few ways for these reversals to occur. When a company first goes public, the company sells some shares to the public, this is an Initial Public Offering (IPO). These deals create an influx of capital for the corporation, even raising millions or billions of dollars. As with the first example, investors in this initial public offering receive shares of the company and therefore own a piece of the company.
The act of “trading” would be taking the shares of a company and selling them for a profit, with the goal of repurchasing the shares at a lower price. Trading is not a much-loved occupation. It is considered a game by the media and the actions of deep-pocketed traders may come under scrutiny for wrongdoing. In recent years, traders have been viewed in a kinder light than in the past, but day trading is still frowned upon as an activity.
Stock trading varies greatly from investing where an investor jumps into a company and sticks around for a period of time. The trader buys and sells the fluctuations of shares within the stock market. Looking to make a profit and risk less capital. A trader trades many different time lines, day trading, swing trading, swing long, and scalping.
For example: A trader makes an investment in an IPO because the company looks promising. News about the company appears and many more traders are interested. With everyone buying shares, the demand for the company’s shares drives the price up. When the example trader first entered the stock at the IPO stage, he paid $15 per share, now the demand drives the price to $30 and now even $45.
This triggers all trade alerts and the trader jumps in and buys the most popular stock pick. This drives the price up and over $100 in no time.
How did this happen? A company with a strong stock structure had good news and looked undervalued, investors and traders alike bought, seeing the opportunity to make money from hot stocks. This made the price go up 10 times. Nothing else has happened, the company is not making a profit now, and who knows if the news will turn out to be profitable. At this point, the original investor could sell his shares for a large profit.
Or, the investor can wait to see if the price doubles again or falls as the company grows.
If I am that investor, I sell. I am removing all risk and ensuring my profit. However, that makes me a trader, since I am buying and selling the bull on the stock. The investor would have let the company grow and grow in the hope of becoming very profitable. This is the main difference between investing and trading. Since you are always looking to make a profit, how long will you last? The original investor can always wait for the price to drop a bit and come back in if he really wants to invest in this company.
Over time, the terms trade and investment have changed to mean different things. With the growing popularity of day trading, trading is often thought of as buying and selling over a shorter period of time. While investing is considered as holding shares for a longer period of time. These definitions are not completely accurate, but this is what trading and investing look like. Actually, a lot of it is in the mindset of traders or investors when they enter the stock market. These mindsets are completely different and you better know what you are doing before you put your hard earned capital into the stock market.
As mentioned above, day trading is frowned upon by the general public. Those who only invest like to point out that most day traders lose money and day traders have lost fortunes in a short period of time. They also consider it gambling. Traders like to point out that investors stuck with their stocks during the internet bubble and lost it all, waiting for their turn to get better money. When done wrong, both trading and investing can lose you a lot of money.
Day trading is based on knowledge, skill, technique and a bit of “feel”. You have to put your rules in place and stick to them. You set these rules for a reason, you can’t stop abiding by the rules as soon as a stock goes the wrong way, this will only compound your losses. Sometimes this can be difficult as you just “know” you’re right, and other times you’ll be right and sell only to see the stock rise again. There are plenty of day trading strategies that you won’t be good at all of them. Choose the strategies that work best for you and trade them by following your rules.
These are just a few of the many ways that trading is different from investing. I can’t say that any are better. I day trade to make money, but I have an IRA and 401k that are pure investment. Mostly funds where I let those more in tune with the fundamentals (hopefully) pick their stocks. With day trading I set my rules and trade the highly volatile technical stocks.
The only way trading or investing is wrong is when you lose money. If you are making money, you are doing it correctly, since that is the goal.
