You might me wondering what is the difference between Investing and trading, or you may have been asking: “Am I an Investor or a Trader?”, or you may have never even realized that there was a difference in the first place. In this article I will explain to you the difference between the Investment and the trade.
The definition in its simplest form is:
“Investing is the attempt to make money over a LONG period of time”
“Negotiation is the attempt to make money on a SHORT period of time”
What is this means? This means that you may want to consider 6 months for a long period to hold a stock, so that you’ll call it Investing, and someone else might consider 6 months a very short period of time and they call it Negotiation.
But for the sake of consistency, we will adopt the following rule:
“If the time between the opening and closing of a transaction (i.e. the purchase and sale of a security) can be measured in days or weeks, and then it is Negotiation, and if the duration can be measured in months or years, then this is the Investment”.
To be a good trader, you must be very familiar with technical analysis, as well as updates on market conditions, and upcoming events that might alter these conditions.
The traders, which can be either “Scalpers”, “Day Traders”, or “Swing Traders”.
Scalpers open and close a transaction very quickly, in just a few seconds or at most a few minutes, in search of small profits, but they execute dozens if not hundreds of trades per day.
Day Traders hold on to their positions longer than scalpers but they never keep all the trades of the next day, they close everything before the end of the day.
Swing Traders hold their positions for days or weeks.
Determine the type of trader you are is very important to your success. It is very important to be honest with yourself, there is no good or bad style, it all depends on your personality, style of trading you adopt must match with the type of personality you have, otherwise you’re going to live in the conflict, and this can only be damaging to your trading account.
On the other hand Investors rely heavily on the basic principles to decide whether to buy it or not, and while Traders can make money in an UP or DOWN market, Investors can only make money when prices are rising, because the decision of an investor on the decision to invest or not in company XYZ is based on the fact that he believes that this business will grow and develop in the next few months or years. If yes, then he will buy the shares.
So, how can Investors decide on what company to buy shares?
As I mentioned previously, they are based on fundamental principles. What is this means?
This means they read the financial statements published by this company (Quarterly and Annual), and they try to find out as much information as you can about the inside operations of this company, about management, about their future plans, about their competitors. Basically, they’re trying to see how healthy the company is and if there is room for growth. This is called the Value of the Investment.
This is the kind of fundamentals that investors are interested to evaluate a potential investment.
Investors do not really care about the small daily fluctuations in price, they believe that if a company has a high intrinsic value, then that is the price of the action will be followed over the long term, so they try to buy companies that have high value and selling at a bargain price.
I hope this article explains 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 know exactly what type it is, and what are his strong suites that will be essential in the choice of his style.
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