Hi everyone, here is the fourth post from the series "Education for new investors". I will be sharing my knowledge on topics surrounding investing and readers do not require prior financial background to understand the posts. This one is about "Trading vs Investing".
❓ Trading vs Investing, What is the difference ? ❓
Short answer, none. In both cases you choose a company, open a position with that company, close that position, make a loss, or sometimes make profit.
🤷♂️ So in other terms, what is the difference between a trader and an investor ?🤷♂️
The trader will open positions, keep their trades for minutes, hours, days, or even weeks and expect some kind of return after doing his "technical analysis". The trader will look closely and try to predict price movements in the financial markets, by using historical price charts and market statistics and will also try to identify previous market patterns. The trader will open long positions (hoping that the share price will rise)📈, or short positions (hoping that the share price will drop)📉. There are different types of traders but I will not go into details.
Alternatively the investor, before buying shares of a company, will do a "fundamental analysis". They will try to understand the business’s value by interpreting the company’s financial statements before comparing the actual share price to the share price the investor would estimate the business value. The investor usually open long positions (hoping that the share price rises)📈. When buying the shares of a company, he/she believes that the company is undervalued in comparison to the actual share price and is looking to hold the position for the long term (months, years or even decades for the most patient investors).
🤷♂️What do you recommend to do? Should I trade or should I invest? 🤷♂️
To be honest, there is no right answer.
Trading is riskier than investing and the expected returns are theoretically higher.
Trading is also more time consuming than investing.
If you have plenty of time and like the risky life, feel free to trade.
If you don’t necessarily have the time to look at the charts, then I would suggest for you to invest in the companies that you want, but you have to learn how understand financial statements before investing as a business (a bit of accounting). It will also be time consuming but less so than trading (hope you didn't think it was free money 🤑🤑).
In both cases, never forget that you should only trade or invest the money that you can afford to lose.
These are the top take-away points to know about the difference between traders and investors.