- December 12, 2021
- Posted by: Robert Brown
- Category: Investing
People have been investing since the beginning of time. When one is investing, the “investor” supplies cash (capital) to help a business. The business in turn gives the investor an ownership stake in the business. When we’re talking stock and companies, this investment results in the investor receiving shares of the company. When one invests in a company they are expecting the company to grow well and prosperous resulting in the investor making a profit on their investment.
There are a few ways for these investments 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, the investors in this IPO receive shares of stock in the company and therefore own a piece of the company.
The act of “trading” would be to take the shares of a company and sell them for profit, with the aim of repurchasing the shares back at a lower price. Trading is not a very liked occupation. The media considers it gambling and the actions of those traders with very large bankrolls can be scrutinized for improprieties. In recent years traders have been looked at in a kinder light than 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 holds on for a period of time. The trader buys and sells the fluctuations of the stock within the stock market. Looking to make profit and risk less capital. A trader trades many different time lines, they day trade, swing trade, long swing and scalp.
For example: A trader enters into an investment in an IPO because the company looks promising. News breaks on the company and a lot more trades become interested. With everyone buying shares, the demand for the company’s stock causes the price to rise. When the example trader first entered the stock at the IPO stage he paid $15 a share, now the demand causes the price to hit $30 and now even $45.
This triggers all the trading alerts and trader jump in and buy the hot stock pick. This drives the price up and over $100 in a very short amount of time.
How did this happen? A company with a solid share structure had great news and looked undervalued, investors and traders both bought in seeing a chance to make money on the hot stock. This drove the price up 10 fold. Nothing else has happened, the company isn’t now making profit, and who knows if the news will even pan out to be profitable. At this point the original investor could sell his shares for a huge gain.
Or, the investor can hold on to see if the price doubles again or heads downward as the company grows.
If I’m that investor, I sell. I’m taking away all the risk and locking in my profit. That makes me a trader though, as I’m buying and selling the run in the stock. The investor would have let the company grow and grow hopefully becoming very profitable. This is the main difference between investing and trading. Since your always looking to gain profit, how long will you hold. The original investor can always wait for the price to drop a little and re enter if he really wants to invest in this company.
Over time the terms trading and investing have changed to mean different things. With the rising popularity of day trading, trading is often looked at as buying and selling over a shorter period of time. While investing is viewed as holding on to shares for a longer period of time. These definitions are not completely accurate but this is how trading and investing is viewed. In reality, a lot of this is in the traders or investors mindset as 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 before, day trading is a frowned upon by the general public. Those who only invest like to point out that most day traders lose money and that day traders have lost fortunes in a short amount of time. They also consider it gambling. Traders like to point out that investors held onto their shares during the internet bubble and lost everything, waiting for a turn for better money. When done poorly, both trading and investing can lose you a lot of money.
Day trading is based on knowledge, skill, technique and a little “feel”. You have to put your rules in place and stick to them. You put these rules in place for a reason, you can’t not stick with the rules as soon as a stock heads the wrong way, this will only compound your losses. Sometimes this can be tough as you just “know” your right, and sometimes you will be right and sell only to watch the stock rise again. There are a bunch of day trading strategies you will not be good at all of them. Pick the strategies that work best for you and trade them following your rules.
These are just some of the many ways that trading is different than investing. I can’t say either is better. I day trade to make money but I have IRA’s and 401k’s that are pure investment. Mostly funds where I let those more in tune with fundamentals (hopefully) pick their stocks. With day trading I set my rules and trade the technical highly volatile stocks.
The only way trading or investing is wrong is when you lose money. If your making money, your doing it correctly as that is the goal.