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I always thought investing and trading are the same thing when I started my stock investing journey. Both terms require us to buy stocks and sell them for profits.
But they are quite different in terms of time horizon and the reason behind the purchase you made.
Also, not everyone is suitable to be a stock trader.
In this week’s newsletter, let us talk about investing and trading, along with their differences.
What is Investing
Investing is like planting trees. Like durian trees, you have to wait at least 5 years to reap the rewards.
With an investor mindset, you invest in a business by buying its stock after fundamental analysis, and the plan is to let this company grow your money over a long period of time.
You believe this business will grow in revenue and profit over 10 years or more, at the same time growing your money.
What is Trading
Trading is like going into a casino, but with a well-planned strategy in mind. By taking calculated risks, you make confident bets that will reward you within days or weeks.
With a trader mindset, you buy a stock after technical analysis, and the plan is to take advantage of its price volatility to earn some quick money over a short period of time.
You believe the stock price will go up within a few days or weeks, then sell the stock at the right time to make some money.
Comparison Between Investing and Trading
Here’s a comparison table between investing versus trading:
Should We Be Investing or Trading
Let’s talk about trading first.
Image Source: The Financial Pandora
Traders should understand how the stock market works, such as trends and market sentiments. They are required to constantly monitor the stock market for any new opportunity.
They have high risk tolerance and will not get distracted when there are dips in the market.
Generally, trading is more complex than investing.
Without a good foundation and understanding, you are basically gambling, not trading.
Here are the traits a trader should have:
- High risk tolerance
- Passionate in financial market
- Know how to do technical analysis
- Don’t mind spending time on stock trading
- Have some knowledge on the stock market
Image Source: The Financial Pandora
Investors don’t have to know much about trends and market sentiments. They don’t have to constantly monitor the stock market, as they will keep invested for many years and decades.
Investing suits risk averse persons and requires investors to have good patience to see the results from investments.
Compared to trading, investing is much simpler but boring, as investors have to grow their money in long period of time
Here are the traits an investor should have:
- Patience
- Can be risk averse or high risk tolerance
- Prefer growing money with less effort and time
- (Optional) Know how to do fundamental analysis
In Summary
If you ask for my opinion, I’ll always recommend investing for the long-term as I prefer growing my wealth slowly and with less effort without having too many risks.
Besides that, trading has too many drawbacks compared to investing. It is an expensive, high-risk, and time-consuming activity.
Having said that, how you invest your hard-earned money is ultimately up to you.
If you insist on trading, I suggest using not more than 10% of your total investment. That way you will not impact your net worth if you lose money during trading.
That’s all for this week, my friend!
Talk with you again next week.
Your Money Buddy,
Marcus
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→ Versa – Where I invest my emergency fund for up to 4.0% return. Get free RM10 if you register a new account with my referral code “AL9JZJ9H”
