A lot of people confuse investing and trading, though the difference between them is big. Let’s clarify both so you can find out if you’re an investor or a trader and determine which style suits you best. (Hint: unless you have direct access to the global internet mainframe (
you don’t) it’s probably investing)
With investing, you inject your money into stocks, bonds, ETF’s or any other index funds with a long term investment horizon. When you invest, you tend to pick a stock based on fundamental analysis. Although, there are other ways to invest as well.
With fundamental analysis you research whether the company is profitable (or will be in the future) and financially stable. Additionally it’s important to see if stock is currently over- or under-priced. When your research points out that the stock is a good investment, you make the decision to buy some shares. You, as an investor, hope that the company’s management is able to raise the value of the stock over the long run so one day you could sell your stock at a nice profit. This is what is called ‘investing’.
Putting your money in a place with the intention of selling it quickly for a fast profit is trading. Not investing. Trading stocks for example, is done with a short-term focus – sometimes even as short as a couple of seconds. With trading you try to benefit from short term fluctuations in the price of the stock. When trading, you do not really invest money into the company and oftentimes don’t care about the fundamental analysis of the company.
Instead, many stock traders make use of technical analysis. With technical analysis one makes use of charts to determine the short term movement of the stock price. Stock trading is highly speculative but its rewards can be significant.
Why Trading in 2017 is Probably Not for You
Short answer: because the internet..
Seriously though, to best address this question let’s quickly get into how the internet works. The internet is a large network of physical devices and cables. The cables that makes up the internet and connect different countries and continents to each other look something like this:
The internet is made up of these physical cables that cross the entire globe. They mostly run underwater so if sharks felt like it, they could attack the internet; which they did. These cables surface in different places around the world. Generally, the closer one is to where a cable surfaces the better and faster the internet is.
There is also a hierarchy in the cables. Some cables are more central and important than others and one very important cable is nicknamed ‘Ruby’. This is a cable that connects North America to Europe and big companies like Google locate their servers near to where it surfaces to optimize the internet speed and quality. One end of Ruby surfaces in some obscure town in the Netherlands and the other surfaces in…can you guess?
New York City – Wall Street.
I’m discouraging people that are interested in making money in the financial market (especially beginners) from trading because it’s not really a balanced playing field. Unlike investing. Professional traders have far better software, superior computers (by far) and a whole lot more money to optimize their trading process. As an amateur-trader it’s simply not possible to compete with them.
By the time you decide that a trade might be worth making, they will have outdone you 99 times out of a 100. It’s not impossible to make money with trading but the disadvantages outweigh the advantages.
Why Investing is a Game Everyone can Win
Whereas trading has become increasingly exclusive over the years, investing has become more accessible. The development of investment vehicles like index funds and ETFs have given the know-nothing investor the power to make intelligent investments. Sure, the prospect of quick cash is less prominent but the guarantee of steady returns is much more attainable than it is with trading.
With the right information, any amount of money over – let’s say $50 – and some discipline any person can make well-diversified and profitable investments nowadays. And the best thing is that it’s a game that everyone can win. And that’s something worth considering!