Investing vs Trading: What’s the Difference?
Here comes the million dollar question!
“How is trading different than investing?”
One of our followers recently even asked me “Is trading a sin?” As an Invest Diva, it is important to learn what investing truly means. Here is the main different between the two:
What is investing?
An investment focuses on a long term growth of your wealth through buying and holding.
What is trading?
Trading involves more frequent buying and selling.
Both have their own pros and cons. However, if you are not a professional trader who enjoys sticking his/her nose to the screen all day, I recommend most Invest Diva students choose to become an investor (in anything) rather than a trader.
The most important thing to remember on the topic of investing vs trading is that when you are investing, you need to look at the big picture.
Let me give you an example. I got husband, Matt, interested in investing, and he is now addicted to checking the market prices on an hourly basis. While his risk appetite balances out my risk averseness, he is sometimes too much to handle. He jumps for joy when the market moves in his favor, and gets super grumpy when there is a bump in the road.
If you have decided to invest in the markets and not trade, then don’t be like Matt. Do your Invest Diva diamond analysis properly before opening a position, and then sit back and relax, or focus on your main job so you don’t get fired.
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Remember that the purpose of doing your own investing vs trading is only to grow your wealth, and NOT to generate income. But at the same time, don’t forget to set limit orders to close your position with profit when the markets reach your calculated target price as I’ve talked about in previous videos here and here.
Many markets including forex and some stocks move in cycles and unlike what many money managers say, it is NOT ok to just sit back for like 25 years. Nobody knows what’s gonna happen to the markets in 25 years, and you may even end up losing your initial investment. Everything in moderation.
So... Are you an Investor? Or a Trader? Why?
Come on over to our Facebook page and let me know...
Investing vs Trading: 4 Things NOT to do when INVESTING
As I have explained in depth here, there are 4 no-nos when it comes to investing:
1. Don’t Look At The Minor Moves: Look at the big picture. When you are investing, keep in mind that you are going to be in it for a long time. Therefore having a long term strategy is the key. If you have done you research on the instrument you are about to invest in, you believe that the prices are going in a particular direction for a long period of time. Do not however, that for “cycle markets” such as forex, the definition of “long term” is different than that of stocks or ETFs. The forex market has a maximum trend cycle of 7 years. For example the EUR/USD pair was on an overall uptrend from 2001 to 2007 before it change directions. A well performing stock can be in a general uptrend for over 20 years.
2. Don’t Start with a Huge Amount: If you want to invest in a company’s stock, or in an ETF, buy a small amount of it to start and look if the prices knock it down so that you can buy more at a better price. You can use technical analysis to identify a good market-wide correction to get a better price on buys. When it comes to forex, unfortunately some countries such as the US don’t allow you to pile up on the same currency pair without getting out of your current position. So if you are looking to use this strategy in forex investing, you’d have to spread your investments across multiple accounts.
3. Don’t Panic When Prices Drop: A lot of investors freak out when the market drops. What you really need is discipline. When you are in it for a long run, your investment pays off by controlling the damage to your portfolio when there is a drop in the markets. That means, this may actually be a good time to buy more of your stock.
4. Don’t Buy When Prices Rise: Unfortunately this can happen to the best of us. And it is thanks to the massive amount of market noise everywhere you turn: Social media, TV, radio and even people on the subway. The media get overly excited when the markets are rising, but little do the long term investors know:
What goes up, must come down.
So it is in fact in your best interest to wait the market noise out, and add on to your portfolio when prices go down; That is when the Doctors Dooms and Glooms show their ugly faces on TV and try to convince the audience that every market is going crash. Therefore it takes true courage and discipline to ignore the noise and do as an Invest Diva would.
Three Things to do When TRADING
1. Look for a Market Mover Event: Unlike investing, you should be looking for a quick market mover when you want to trade. An announcement. A data release. An important meeting minutes. These are when the markets move in a specific direction for a short period of time, giving you the opportunity to ride on and earn quick bucks; that is if your analysis is correct.
2. Set a Stop Loss: You most certainly need to panic if the market goes against your prediction when trading. And you need to cut your losses short, without simply hoping that the market would go back to the direction you desire. Most successful traders are those who have low tolerance for losses and high tolerance for winning trades. Do not get tempted to move your stop loss. Just get the heck out, and start another trade. In a traders life, opportunities come on go much quicker.
3. Stick to Your Screen: Only trade if you know you have the time to check the market sentiment often. Some short term traders do decide to go long term in the middle of it especially if the market goes against them. But more often than not, you get stuck in a trend against you that plays your greed and fear like a toy, ruining other winning opportunities as well.
One final nugget of wisdom that stays true no matter what type a money making method you use:
Make Money. Have your Money Make Money. Repeat.