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, he hopes that the company will grow well and be prosperous, which will result in the investor making a profit on his investment.
There are a few ways for these inversions to occur. When a company first goes public, the company sells some shares to the public, this is an Initial Public Offering (IPO). These offerings 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 in the company and thus own a piece of the company.
The act of “trading” would be taking a company’s stock and selling it for a profit, with the goal of buying back the stock at a lower price. Trade is not a much loved occupation. The media considers it a game and the actions of traders with large funds can be subject to scrutiny for irregularities. In recent years, traders have been viewed in a friendlier light than in the past, but day trading is still frowned upon as an activity.
Stock trading varies greatly from investing in that an investor jumps into a company and stays for a period of time. The trader buys and sells the fluctuations of the 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, long swing and scalp trading.
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 stock, demand for the company’s stock drives the price up. When the example trader first got into the stock at the IPO stage, he paid $15 per share, now the demand drives the price up to $30 and now even $45.
This triggers all trade alerts and the trader jumps in and buys the most popular stock pick. This causes the price to rise and exceed $100 in a very short time.
How did this happen? A company with a strong stock structure had good news and seemed undervalued, with investors and traders alike buying on seeing the opportunity to make money on the hot stock. This caused the price to 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 the risk and ensuring my profit. However, that makes me a trader as I am buying and selling the run 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 hold out? The original investor can always wait for the price to drop a bit and jump back in if he really wants to invest in this company.
Over time, the terms trading and investing 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 investment is considered as holding shares for a longer period of time. These definitions are not completely precise, but this is what trading and investing look like. Actually, a lot of this 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’re 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 just 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 held onto their stocks during the internet bubble and lost it all, waiting for a turn for better money. When done wrong, both trading and investing can cause you to lose a lot of money.
Day trading is all about 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 break the rules as soon as a stock veers in the wrong direction, this will only compound your losses. Sometimes this can be difficult as you just “know” you are right, and other times you will be right and sell just to see the stock go back up. There are a lot of day trading strategies that you won’t be good at at all of them. Choose the strategies that work best for you and trade them according to their rules.
These are just a few of the many ways that trading is different from investing. I can’t say any are better. I day trade to make money, but I have an IRA and 401k which are pure investments. Mainly 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.
