Trading Vs. Investing , Which Is Right for You, and How to Succeed in Both? read the rest of this article to learn more…
In popular media, however, more often than not, this narrative focuses on the salacious side of investing and trading.
Wall Street, The Wolf of Wall Street, and films like them do this, taking complex financial concepts and contexts and boiling them down, however accurately or thematically, into a satisfying narrative.
This is hardly anything new.
Victorian literature was rife with this as well, from Mr. Merdle and his suspicious investment bubble in Charles Dickens’ Little Dorrit to Mr. Melmotte’s rise and fall connected with his equally-fraudulent investment racket centering on a phantom railway in Anthony Trollope’s The Way We Live Now.
The latter is a particularly prescient title because, like it or lump it, investment and trading are at the heart of “the way we live now.”
For as dramatically satisfying as the salacious side of these practices may be, when practiced genuinely and in good faith, they remain cornerstones of commercial and personal wealth.
That’s why these stories remain so tantalizing.
On the one hand, we know that pride (and poor investment strategies) go before the fall, but on the other hand, there’s something undeniably and irresistibly attractive about the idea of making your own wealth and way in the world.
Which begs the question – which is the better way to achieve that wealth, investing, or trading?
An Overview of Investing
The most fundamental philosophical difference between trading and investing can be seen as the difference between a short and long-term strategy and approach to building wealth.
There are exceptions to this, and we’ll touch on those, but for now, it’s best to think of trading as being more like a sprint and investing as being more akin to a marathon.
The slower, more sustained approach is at the heart of investing. You’re putting money into an enterprise with the expectation that it will grow over time.
You aren’t typically looking to get a return on that investment in a mere matter of weeks or months.
The true fruits of your labor might not even be apparent for a year or two.
This requires careful planning, a significant part of which is vetting the enterprises in which you invest your money.
A key part of both Dickens’ and Trollope’s investment morality tales is the idea that people get enticed by the grandeur and extravagance of popular investment opportunities and fail to do their due diligence, with disastrous consequences.
You want to avoid a similar fate at all costs.
Sites such as Investor.gov help give insights into what you should look for and how you should operate to invest as safely as possible and avoid scams. Among the points they recommend include:
- Working with and asking investment advisors and brokers who have an understanding of the investment industry and what’s legitimate as opposed to what looks fishy
- Taking the time to do your own research into a given investment firm or offer before investing
- Utilizing online resources, including those on their website, to help you investigate the validity of a given investment opportunity
- Being aware of the rules regarding shareholder voting and your rights as a shareholder
In addition, you’ll want to lay out a plan before investing. While good trading doesn’t always follow the split-second whims and worries of a given trader, it is subject to a lot more in-the-moment action and improvisation.
By contrast, successful investing tends to be a lot more structured and scripted. You set out concrete ideas for what you want and expect to achieve in a given timeframe, invest and review, and then make decisions about your investment accordingly.
An Overview of Trading
By contrast, trading, as stated, has to do a lot more with where a given market is and how you can take advantage of the moment to turn things to your advantage.
While films such as Stone’s and Scorsese’s certainly dramatize things, there is some truth to the mythologized image of the high-octane adrenaline-fueled intensity-driven trader.
Where investments are more like planting seeds and watching them grow over time, trading is more like a turn at the roulette wheel or poker table with five, six, or seven figures or even more riding on the outcome.
Trading, thus, requires up to the second information. Yesterday’s news is just that – and while it may help provide context, trying to trade on old information alone is like placing a poker bet based solely on what happened three hands ago, rather than the cards on the table right now.
That’s why, if you are going to seriously pursue trading, you need to be locked into the latest news around the clock. The markets can change on a whim, and when they do, you may have only hours or even minutes to capitalize on it before the rush.
The same goes for currency trading. The political fortunes of a given country can drastically impact its currency and, in so doing, offer savvy investors a chance to score big.
A famous example involves George Soros and his 1992 coup against the Bank of England on “Black Wednesday.”
A variety of issues, ranging from the introduction of the Euro to Britain’s high inflation rates to complex long-building socio-economic trends in the UK and EU, led to a massive opportunity for currency traders to take advantage of an overzealous and overextended UK.
Soros did so to the tune of more than $1 billion, while the day’s disastrous currency trading lost the Bank of England roughly £3.3 billion.
While the signs that things may have been coming to a head for the UK had been in the offing for a while, few would have expected that they would due to such a sudden and disastrous extent.
On the flip side, being ready and locked into the moment helped Soros take on more than $10 billion worth of Pounds Sterling and “break” one of the biggest banks in the world.
More than two decades later, first Greece’s bankruptcy and then Brexit have seen both the Euro and Pound Sterling dive sharply at certain intervals, creating crises for some investors and opportunities for others. That dichotomy between crisis and opportunity is at the core of trading.
Compared with investing’s more stayed pace, the world of trading seems to always rest on a knife’s edge.
It can turn suddenly and sharply, and when it does, you’d rather be the one holding the handle than held at knife point financially.
The first and perhaps most important trading tip to recognize is that just about everyone does it, even if you don’t know it.
If you have a 401K as part of your job, congratulations, you’re investing.
This is a very common form of investment, namely, in one’s future pension benefits.
Investing in your 401K and tracking its progress over the years is incredibly important if you hope to ever retire someday.
There are specialists who help with 401K investments, which brings us to our next investment tip – financial planning.
As demonstrated, savvy investing isn’t the sort of thing one does on the spur of the moment.
That’s because investment is highly tied into growable, sustainable wealth, as opposed to quickly-made and potentially quickly-lost riches.
As Chris Rock puts it in one of his investment routines, “wealth” is the kind of thing with which investors can enrich whole communities, and which families can pass down to one another for generations, while “rich” is something you can lose because of a “bad weekend.”
It is, thus, often a good idea, especially when investing for the first time, to sit down with a financial planner and work out the ins and outs of your investment strategy.
After all, different types of investment are better for different goals, and these will differ again depending on certain aspects of your financial status and portfolio.
The type of investments made to support 401Ks, families, and retirement plans, for example, are often very different from those made with the goal of helping entrepreneurs build their businesses.
There are also different benefits of investing in different markets or assets. For example, investing in your own home can help make sure that you have a highly-valuable asset on which you can always rely on.
On the other hand, your home is hardly an easily movable asset, and so while doing this can help with your home’s long-term value, it doesn’t give you a lot of leeway if you ever wish to actually convert this wealth into cash, unless you plan on selling.
On the other hand, investing in and “flipping” homes has become a popular strategy of late.
This is a form of investing that mirrors trading a bit more closely in its acquire-and-deal pace and intensity.
That said, you can also invest in a property such as an apartment complex and have others manage it for you, giving you a steady investment on the property value long-term, as well as a steady cash flow.
Investing in companies provides something of a middle ground.
That said, unlike fixed assets such as property, investing in a company is a far more liquid and tradeable asset.
By contrast, investing in gold and silver has long been the stalwart of those who prefer investing in fixed assets which can remain consistency valuable no matter the nature of the market, albeit often with less upside.
Put simply, investing in a company, you might be getting in on a Google-sized hit or Theranos-sized bust, whereas gold will, more or less, always be gold.
There are at least four different types of traders, each referring to the amount of time a trader typically holds onto a trade position:
- Position traders, who can hold profitable positions for months or years at a time
- Swing traders, who can hold positions for days or weeks
- Day traders, who typically trade and hold positions within a day’s trading period
- Scalp traders, who close positions as soon as possible with practically no overnight holdings
It should be noted that, unlike the more rigidly-defined investment types and markets described above, these trading roles can shift for a given trader.
In some instances, they may have positions or be caught up in a trading moment which requires the fast acting nature of a scalp trader, while at other times, the long game provided by a position trader’s ethos is best.
Your ultimate goal as a trader is to buy and sell in such a way as to be able to sell or close them in a better position than when you bought them.
As the saying goes, Buy Low, Sell High.
Of course, that is an oversimplification, and there are an infinite number of permutations which can impact your choice of which instrument to buy, which to sell, and when to do either.
What’s more, while trading is often done in the moment, preparing for that moment with a plan is key.
As stated, trading is more akin to a sprint than a marathon, but if you don’t have a plan for training for that sprint, you’ll be unprepared and left in the dust.
What’s more, for as tempting as it may be to be quick on the trigger, unless you have an unmissable deal staring you in the face, savvy traders more often stick to their plans than deviate from them.
Like batting in baseball, long-term trading is a game of patience and percentages.
If you try to hit a home run every time, you’ll most likely “overswing” and strike out, and even if you do hit a home run once or twice out of 10 times, a batting average of .200 isn’t enough to keep anyone in the big leagues for long.
You need to mix big splashy successes with small, sustainable, and far more common and replicable ones.
You also need to know ahead of time how much money you can afford to lose.
While this is a risk for investing and trading alike, barring massive sudden market dives, given the fast-paced nature of trading, you can lose a lot more a lot quickly due to a bad day on the market.
Given all the drama and intrigue surrounding investing and trading, it can be all too easy to get caught up in the moment or carried away.
However, dedicated research, careful planning, and a solid strategy for investing and trading are the true keys to achieving your happy ending.