XSPY Bits #1: Trading vs Investing?

Hello there, Alson Chew here. Let me ask you, do you know what is the difference between investing and trading? You may wonder…aren’t they supposed to be the same? Not exactly. I get many people asking me what the differences are, so I would like to give a simple and brief explanation.

 

investing vs trading in the stock market

 

1. Period that you hold your stocks

Stock trading is a method in which you hold your stocks for a short period of time. Stock investing is when you hold the stocks for a long period of time. Stock traders could hold their stock for a week or even less, whereas investors hold their stock for years and years. Note that short term fluctuations in the stock prices are not significant to investors. They focus more on the long run growth of the stock.

Investors will study a company’s performance and determine the potential for long-term growth or value. Traders will look for small mispricings in the market and capitalize on it. Once, the mispricing seems to be corrected, they will move on to another stock.

There are different types of terms that we use for traders. None of these are wrong methods, they are just different strategies.

Scalp traders = might be in a position for just minutes.

Day traders = hold the stock for just the trading day

Swing traders = holds the stock for days or weeks

 

2. Risk level involved

There will generally be risk that both traders and investors must take. However, trading incurs a higher level of risk compared to investing. Traders are willing to take this higher risk to gain more profits in a shorter amount of time. This is due to the short term fluctuation that the stock will go through.

Investing typically brings in lower returns in a short run, but could be very profitable in the long run. Investors can also earn higher returns from compounding interests and receiving dividends if held for a long period of time.

 

3. Different set of skill and knowledge needed

Traders are skilled, technical individuals who time the market and learn market trends to hit higher profits in the stipulated time. It is related to the psychology of the market. Investors on the other hand, analyze the stocks they want to invest in.

Investing also includes learning business fundamentals and commitment to stay invested for a longer term.

 

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