The reason why I’ve decided to write about similarities as well as differences between investing and trading today is because, of late, I have noticed many newbies mix up between the two – some of them are looking to buy companies to hold for the long-term (but refer to them as “trading”), while there are some who are looking for short-term profits (but refer to them as “investing”.)
I hope that, after reading through this simple post, you will have a better understanding about both investing as well as trading:
Similarities between Investing and Trading
1. You buy and sell the same way
One of the most obvious similarities between the two is that, you buy and sell the same way on your brokerage account.
2. You need a plan!
One of the easiest way to “burn a big hole in your pocket” when it comes to investing/trading is to simply invest/trade in a company because “someone tells you to do so”, or that you have read about some recommendations somewhere.
While there are no shortage of “recommendations” of what you can buy on the stock market, there really are no shortcuts if you want to make a positive return on investment (or ROI) on your investments/trades – you need to put in the hard work to devise a plan on how you intend to invest/trade (I’ll share more on that later.)
3. Everyone is different in investing and trading
As humans, we are all different in our own ways – the same applies when it comes to investing and trading.
Each of us have our own way to invest (for instance, some may prefer to invest in a company in one lump sum, some may prefer to invest in a company on a periodic basis) and trade (different traders may use different indicators to help them determine their entry, profit, and stop-loss targets) – there really are no hard and fuss rules as far as investing and trading are concerned. You need to be comfortable with the way you invest and trade.
4. There are risks involved
Don’t let anyone fool you into believing that you can win in all your investments/trades.
Especially where the latter (i.e. trading) is concerned, no one in this world can make make profitable trades all the time (I’m sure you’ve heard of the saying that, even the best trader in the world have a win rate of about 60.0% – if you can beat that, you can consider yourself as being one of the best already.)
Also, as far as investments are concerned, there may be times where a company may come into an unfortunate event resulting in the business suffering from a permanent dent – and when that happens, you need to divest your investment (even at a loss) to avoid suffering a huge loss.
5. Only trade/invest with excess money
Never trade with money you need for your day-to-day expenditure.
As far as both investing and trading are concerned, there are no “sure wins”.
Additionally, for the former, we are talking about staying invested in the company for years (or even decades); for the latter, it is inevitable we may lose money from some trades.
Differences between Investing and Trading
1. Time horizon
One of the biggest differences as far as investing and trading is concerned is in terms of the time horizon.
You are talking about “investing” in a company when you are intending to stay invested in the company for years, or even for decades. The only time you will think about selling your shares of a company is when there are other better opportunities available (which can see your return on investment improve), or as I have mentioned earlier in this post, when the company’s business suffers from a permanent damage as a result of an unforeseen event.
On the other hand, the time horizon as far as “trading” is concerned is in terms of just a few months, a few weeks, a few days, or for some, just a few hours or even minutes.
2. One focuses on analysing quarterly/annual reports, while the other focuses on chart movements
Another important difference you need to take note of as far as investing and trading is concerned is that, the former involves studying a company’s quarterly/annual reports, while the latter involves on studying a company’s chart movements.
Before you invest in a company, one of the things you need to do is to study a company’s quarterly/annual reports (I tend to look at a company’s quarterly/annual reports over a 5 year period) to make sure that the company is able to grow its revenue as well as net profit over the years. Another thing I will look at is the company’s total borrowings (my preference is to invest in companies that are in a “net cash” position – meaning its cash and cash equivalents minus its total borrowings is a positive number), as well as whether or not the company is able to increase its dividend payouts to shareholders over the years (one of my requirements when it comes to choosing a company to invest in is one that is able to pay out an increasing dividend to shareholders over the years.)
As far as trading is concerned, I am focused on the company’s share price movements. I make use of some technical analysis indicators, along with candlestick patterns to help me identify my entry price, profit target, as well as stop-loss target. For those of you who are looking for book recommendations, I recommend the following 3 books authored by Louise Bedford, an Australian trader:
i. Trading Secrets
ii. Charting Secrets
iii. The Secret of Candlestick Charting
The reason why I highly recommend the above 3 books is because, each and every concept is explained in simple layman terms which makes understanding a breeze. Additionally, there are also plenty of real-life examples included which helps further reinforce our understanding on the various concepts.
3. What should be in your investing/trading plan
What happens when you go to a war without a plan? – that’s right, you will end up suffering a crushing defeat by your opponent.
It may sound obvious, but I see many people jumping into an investment/trade without a plan in place – this is akin to going to a war without a plan.
So, what you be in your investing/trading plan?
Investing: Before you come up with your investing plan to invest in a company, I assume that you already have gotten a good understanding of the company, convinced of its long-term growth, and you’d like to invest in it. What you need in your investing plan include an entry price (I personally make use of valuations as well as reading a company’s share price movements to identify my entry price), reasons why you want to invest in the company, conditions which, when they happen, you will divest your investment in the company (you can identify threats to the company’s business when you study about the company and if these threats really happen and they cause a permanent damage to the company’s business operations, that is when you will want to divest your investment in the company.)
Trading: After studying the company’s historical share price movements, I will identify my entry price, profit target (where I will exit trade for a profit the moment my profit target hits), along with a stop-loss target (where I will exit trade for a small loss if the company’s share price does not move in the direction I want but instead in the opposite direction.) As far as trading is concerned, as I have mentioned earlier, you need to accept that there is no way you can make profitable trades all the time (if you cannot accept that losses are inevitable, then trading is not for you), and that you need to stick to your trading plan very diligently (especially to exit trade for a small loss when it hits your stop-loss target.)
I hope that for those of you who are new to investing and/or trading, this share gives you a better understanding on the similarities and differences between the two, and that before you embark on your investing and trading journey, you take some time to educate yourself (it can be through books, videos, or websites) to learn about the basics to investing and/or trading before you go into it.
If you have any questions you like to ask, you’re most welcome to get in touch with me here.
With that, I’d like to wish you the very best in your investing and/or trading journey! 🙂
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