Ever since I started to learn about the financial market, I’ve always come across Facebook and Youtube ads about courses where ‘gurus’ or ‘experts’ will teach you how to make money in through the financial market.
The problem is, the terms ‘investing’ and ‘trading’ have been so frequently used in these marketing ads, people are starting to mix and generalize them into the same thing.
In reality, ‘investing’ and ‘trading’ are very different in nature. Hence, it is crucial for you to understand their difference before you start your investment or trading journey.
With that in mind, let’s get started:
(1) Investors invest in a business, and traders trade the numbers. What do you want to do?
Imagine, today, you and your friend bought a bag of corn each.
The next day, your friend sells off the corn at a higher price to another person. He profits from the direct price difference of the corn.
This reflects how trading works.
On the other hand, you decided to grow the corn in your backyard. Although you may need to wait to reap the fruit of your hard work, your bag of corn will eventually grow into a land of fresh sweet corn that you can sell in the market over and over again.
And this, is how investing works.
Investing and trading both involved the goal of profiting from the stock market, but in a distinct manner.
Essentially, you are buying part of a business when you invest in the shares of a company. As such, you care whether the company you invest in can grow and deliver profitability in the long run.
On the other hand, stock traders look to profit from the market with the short-term price difference. As a stock trader, you do not put much emphasis on a company’s long-term growth prospects.
Investor build assets with their capital. Traders, on the other hand, earn income with their capital. The question now is, what is your intention when you want to learn about stocks?
(2) Investors are in for the long run, traders operate in the short run
How long do an investor and trader hold on to their shares?
An investor will normally eye to hold the shares of a company for a long-term basis, normally for years.
Hence, an investor pays a lot of attention to the fundamentals of a company (eg. Cashflow & debt status) in order to make sure the company continues to grow in the long run.
Moreover, an investor does not need to constantly monitor their investments. Short-term market movements are not a big concern to investors with a long-term mindset.
Depending on one’s trading style, a trader may hold their shares for a few minutes, hours, days, or weeks. This is relatively shorter in timeframe compared to investing.
With such a short timeframe, constant monitoring is needed to ensure one does not miss out on any significant market movement.
In short, investing require more prior effort (eg. Studying annual report) before making a move, while trading requires more constant effort at any point in time while stalking & being in the trade (price monitoring).
(3) Investors and traders make money differently
Investors profit from the stock market via capital appreciation (the increase in share price) and dividends (profit sharing by companies).
On the contrary, traders earn their wealth via price movement (price hitting target profit in traders’ desired direction) and/or short-term price difference (a.k.a scalping or arbitrage).
While dealing with the similar derivative (stocks), there is a significant difference between how an investor and a trader makes money.
(4) Investors and traders experience risks differently
Now, this is where many ‘experts’ or ‘gurus’ failed to explain or clarify enough.
Ultimately, you will need to deal with risk regardless if you are investing or trading.
However, the risks involved in investing and trading are not the same.
As an investor, your major risks involved the sudden change of fundamentals (eg. Low debt to high debt status) and the business nature of the company (eg. People switched from watching TV to Netflix).
As a trader, your major risks involved price not moving in your desired direction (eg. You buy into Meta shares in hope that its price will go up, but it turns out otherwise) and capital mismanagement (eg. Placing too much of your overall capital in a trade and end up losing them).
Investors invest their confidence towards a business, traders trade probability for profit.
(5) Expectation Setting: Quick & high return! (Or is that the case?)
The biggest problem with ‘experts’ and ‘gurus’ that offer courses these days is this:
They tend to give unrealistic expectations to their target audiences in order to convert them into paying customers.
As an example, investing ‘experts’ use marketing gimmicks to portray how one or two students managed to get X% of return within 3 months after attending their investing course. However, they fail to convey that the true idea of investing is a long-term effort that requires time and patience to bear fruits.
Another example would be trading ‘gurus’ that boast potential high returns monthly after attending their course. The other side of the story that they do not cover is the steep learning curve that requires a lot of mental strength and discipline (plus mistakes & failures) before achieving the return they promise.
In short, these ‘experts’ and ‘gurus’ entice potential customers with (1) Potential Fast Returns and (2) Potential High Returns. This is totally in line with the mindset of people nowadays who greed for a fast and high return with little effort.
Investing and trading is simple to learn, but not easy to master. Set realistic expectation that includes time to climb the learning curve before enrolling in this journey.
Verdict: Are investing and trading for you?
For everyday working people, the short answer for investing is a big YES while the short answer for trading is no.
Investing is the art of asset-building with your existing wealth on a long-term basis. In my opinion, the knowledge of investing is a crucial skill to learn as a part of personal finance management.
In comparison, trading is a discipline that makes a profit from the knowledge of probability and proper risk management in a short-term timeframe. Moreover, it’s the nature of a shorter timeframe, and emphasis on price movement means higher commitment and psychological discipline for a trader.
That said, once a committed trader manages to build consistency with his/her skills - it is, without doubt, a rewarding career path.
The bottom line?
Have a clear intention before you embark on your investing or trading journey. Do you want to invest in a business, or do you want to trade a game of probability?
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Disclaimers
Any of the information above is produced with my own best effort and research.
This post is produced purely for sharing purposes and should not be taken as a buy/sell recommendation. Past return is not indicative of future performance. Please seek advice from a licensed financial planner before making any financial decisions.
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