First, let us understand what is the difference between trading and investing? Both terms seem similar, as both are aimed towards generating profits. However, these are two very different methods in generating profits in the financial market.
In trading, the focus is on short-term gain, from buying and selling, deriving profits from price movement of, for example, a stock. Long term prospects or value of the stock is not a main concern here. We aim to reap profit within a short period of time, say within weeks, days, hours, or even minutes, depending on the types of trade.
Investing, on the other hand, focus on a longer term gain from the value of a stock. An investor usually takes a longer term view and look at the value of a stock or a business that can appreciate in value over time, and profit from its capital appreciation. The short-term fluctuation of the financial market is not as much a concern.
So which method is better, which method should you go for? These are common question I get. I have been doing both, and let me explain by sharing with you from my personal experience, to help you better understand and in making your decision.
In my early years, I was young then and time was my friend. I could afford to take more risk, as I had a longer time horizon to recover from any setback should I fail to success. What I did not have much was money. I would like to see quick results and earn money in a short period of time. I decided to start acquiring the necessary skills to do trading as my form of income.
As a trader, I spent plenty of time doing technical analysis of stocks, executing and monitoring price movements and my trades. A lot of attention and focus were required on a daily basis. I made good profits on some days, and losses on others. Though I managed to make more profits than losses, I spent plenty of hard work and efforts doing analysis of my trades, and fine-tuning my trading strategies, methods, emotions to seek more consistency in my trades and profits. Later on, I got married and had a family. This was when I started to re-examine my priorities in life, and the ways I was going to create my wealth.
With a family, I started to do longer term financial planning. I started to look at spending more time with my family, and this was when I look forward to achieving financial freedom. Having a family helped me re-strategize the way I would want to achieve my financial goals and freedom, so that I could have more time for my loved ones. This was when I started to re-channel more efforts towards investing,
By investing, I hunt for good value stocks for either growth or income. My strategy is to keep the stocks over longer period of time. As good businesses grow, the value of their stocks will appreciate in long run. Some stocks have been in my portfolio for the past one to two decade, growing in value consistently in the long run. By doing investing, I spend much lesser time having to monitoring each stock, unlike trading. At the same time, these stocks are providing me with good dividends as my passive income over the years. Investing has helped me to achieve financial freedom, free up my time to either spent with my family, or continue re-investing my gains and looking for new investment opportunities as my passion.
From my experience shared above, I would like to summarize some essential points that differentiate between trading and investing that will be useful for reference.
- Looking at short-term gain, in hours, days, or weeks
- Stock value is not the main concern
- Profit/gain is aimed at pricing movement of a stock
- Profit/gain can be quick and big, likewise for losses
- Need active monitoring and managing your trades
- Risk is generally higher as trading is more sensitive to short time price and market fluctuations
- Difficult to achieve consistent results
- May not be suitable for those with low risk appetite, or when you cannot afford to take risk, for example, if your money is required for retirement purpose
- Looking at long-term gain, over a longer time horizon, typically in years
- Looking at value of a stock and business that can appreciate over time
- Profit/gain is generated over longer period of time in a more consistent manner
- Aim at capital appreciation and income
- Can take a more passive approach in monitoring your portfolio, as it is not about short-term gain
- Good to start early, allowing time to compound and build your wealth or retirement income over time
- Good strategy towards achieving financial freedom, having your money works hard for you, providing you more free time
By now, you should have a good idea the differences between trading and investing, and in a better position to determine the suitable methods to deploy in your journey in growing and preserving your wealth.
Steve Roger is an entrepreneur and business owner with over two decades of investment experience in areas of properties and the financial markets. He is now living his lifestyle with passive income streams. With his passion and experience in investment and financial planning, he is keen to share his views and insights relating to money matters and personal finance. Visit his blogs and find out more money ideas at http://www.themoneyideas.com/blog.
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