As a professional in the investing and trading industry, I get the opportunity to talk to tons of newcomers to the market, both on the side of the companies and on the side of the investors and traders. When talking to folks that are looking to enter the market, one of the most common questions that I get is, “Should I trade or should I invest?” While you may think it’s a cut and dry question, it really isn’t. Today, we’ll talk about what makes an investor and what makes a trader to decide which you are.
What Does It Mean To Trade A Stock?
In some ways, trading a stock is a lot like investing in a stock. Ultimately, when you trade, you are going to buy and sell shares of a company. However, the reasons for the purchase will be very different, and the amount of time that you hold onto the shares will also be far shorter.
Stock traders ultimately look for short term opportunities to make a relatively large profit. Often paying very close attention to technical data, as well as mapping coming financial catalysts, traders look for opportunities in which the value of a stock will move rapidly. In general, traders will hold onto the shares that they’ve purchased for periods that range from hours to weeks and on the rare occasion, months.
What Does It Mean To Invest In A Stock?
Before we get into whether you’re an investor or a trader, it’s important that you know what these terms mean. So, what does it really mean to be an investor? By definition, investing is the process of:
“Expending money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or by using it to develop a commercial venture.”
In the stock market however, there’s a bit more to that definition. When investing in the stock market, what you are doing is purchasing shares of a company. The goal of this purchase is for the company to grow, in turn, increasing the value of the shares that you’ve purchased. Some shares also come with dividends, giving the investor a recurring payment that is either predetermined or based on the performance of the company.
In general, investing is a long term process. While market values tend to fluctuate on a shorter-term period of time, over the course of 30 years, they tend to be fairly reliable in producing gains for investors. In fact, in general a 30 year investment in the stock market will yield a return rate of about 7% annually. So, investing is really a long term play in the market.
Are You A Trader Or An Investor?
Before you start learning about how to trade stocks or how to invest in stocks, it’s important to answer this key question… Are you a trader or an investor? There are a few charictaristics that define the two:
- Comfort With Risk – One major factor that you have to consider when figuring out whether you’re a trader or an investor is your comfort with risk. At the end of the day, while risk is involved in anything you do in the financial markets, risks associated with investing are far lower than risks associated with trading. After all, predictions that have more time to come to fruition are more likely to do so. Therefore, the short term nature of trading adds a new level of risk. So, ask yourself, “Just how comfortable am I with risk?” If you’re OK with taking on high risk for high potential profits, trading may just be for you. If you’d rather take minimal risk while generating average market gains, you may just be an investor.
- Time – Another factor to consider here is time. Ultimately, investing is a set it and forget it process. While there will be some dedication of time to the process in the beginning, and occasionally during portfolio adjustments, there’s not much time required overall. However, traders spend tons of time in front of the computer, analyzing charts and making their moves the market. At the end of the day, if you don’t have at least a few hours per day during market hours to commit to trading, investing may just be your better option.
- Goals – Finally, it’s important to consider your goals. If your goal is to build wealth over a period of time so that you can retire comfortably, investing is going to be the way to go. At the end of the day, the low risk associated with investing in comparison to trading is better when your retirement is at risk. However, if your retirement investments are already in order, and you’d like to accelerate your wealth building, trading may be a better option. After all, investing is a slow growth process. While trading is risky, making the right moves can definitely help you to build wealth at a faster pace.
The reality is answering whether investing or trading will be best for you is something that only you can do. However, considering just what investing and trading are, your goals, the amount of time that you have to commit to the process, and your comfort with risk, should give you all the information you need in order to make a better decision with regard to which direction you should go.