There's a question that is generally asked by people who are new to financial markets and is debated by experienced ones. What is the difference between trading and investing? The two are very similar.
In my book, The Essentials of Trading, I followed this theme by discussing the idea that the difference is merely definition. They are the most simple application of capital in the pursuit of profits. When investing in stock, one would hope it either appreciates in price, or earns dividends. In trading someone expects to exit. Price targeting is one way this happens, or perhaps it is in terms of how long the position will last. The trade has a finite life. Investing is more open-ended. An investor will buy a company's stock and may never plan to sell.
Here is an example. Warren Buffet can be our investor. When he sees an undervalued company, he buys it, and hold on to his positions for as long as he continues to like them. He doesn't think in terms of a price to exit the stock. Think of George Soros, the trader. His famous trade was shorting the British Pound when he though the currency was overvalued and ready to be withdrawn. His position was based on circumstance. When the Pound was allowed to float freely, and devalued in the market, Soros exited with a good profit. This meets the criteria for having an exit plan, making it a trade.
Trading can also be defined as another way. It has to deal with how capital is expected to produce a return. The appreciation of capital is the objective in trading. You buy a stock at 10 and expect it to go to 15, expecting it to go through a capital gain. If dividends or interest are paid out along the way, that is fine, but likely only a minor contribution to the expected profits.
Investing, however, looks more toward income over time. The major focal point is income production. So, do investors experience capital appreciation? Unlike in trading, that is not the main motivation, but yes.
Most people think of their biggest investment as their home. Based on our second definition, a home wouldn't be considered an investment, though, as it doesn't produce income. In fact, it produces many more expenses. A home is obviously a trade. When we buy it, we hope it will increase in value. On top of that, the fact that people plan to move in, then sell it makes it even more of a trade. Unless you own rental property, which is an investment. The confusion between trading and investing is easily had. Buying and selling are pretty much the same. The decisions are identical as well when it comes to the analysis one does. The intention and definition is what separates trading and investment.
In my book, The Essentials of Trading, I followed this theme by discussing the idea that the difference is merely definition. They are the most simple application of capital in the pursuit of profits. When investing in stock, one would hope it either appreciates in price, or earns dividends. In trading someone expects to exit. Price targeting is one way this happens, or perhaps it is in terms of how long the position will last. The trade has a finite life. Investing is more open-ended. An investor will buy a company's stock and may never plan to sell.
Here is an example. Warren Buffet can be our investor. When he sees an undervalued company, he buys it, and hold on to his positions for as long as he continues to like them. He doesn't think in terms of a price to exit the stock. Think of George Soros, the trader. His famous trade was shorting the British Pound when he though the currency was overvalued and ready to be withdrawn. His position was based on circumstance. When the Pound was allowed to float freely, and devalued in the market, Soros exited with a good profit. This meets the criteria for having an exit plan, making it a trade.
Trading can also be defined as another way. It has to deal with how capital is expected to produce a return. The appreciation of capital is the objective in trading. You buy a stock at 10 and expect it to go to 15, expecting it to go through a capital gain. If dividends or interest are paid out along the way, that is fine, but likely only a minor contribution to the expected profits.
Investing, however, looks more toward income over time. The major focal point is income production. So, do investors experience capital appreciation? Unlike in trading, that is not the main motivation, but yes.
Most people think of their biggest investment as their home. Based on our second definition, a home wouldn't be considered an investment, though, as it doesn't produce income. In fact, it produces many more expenses. A home is obviously a trade. When we buy it, we hope it will increase in value. On top of that, the fact that people plan to move in, then sell it makes it even more of a trade. Unless you own rental property, which is an investment. The confusion between trading and investing is easily had. Buying and selling are pretty much the same. The decisions are identical as well when it comes to the analysis one does. The intention and definition is what separates trading and investment.
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