With the stock market, you can make money through two main options – investments and trading. Most people think they know the difference between these financial concepts, but it all boils down to a matter of time horizon and investor mindset. Time horizon shows a person’s ability to hold their positions, and mindset indicates whether you are an owner or flipper. Owners tend to have long-term interests, and flippers find short-term gains appealing. An investor mindset than a trader could be beneficial because many subtle inefficiencies exist within trading that ultimately cost you more money than simply holding onto your stocks permanently if you had gone with a buy-and-hold approach. Let’s now get into these two aspects separately to understand them better.
Investing
With investing, you make your money by backing the right horse. The longer you wait, the more likely you’ll strike gold. You view your investments as your own and always keep in mind the impact your money will have on the company in the future. It works as opposed to just trying to figure out which way the wind blows for each trade you make or whether or not a stock is under or over-valued based upon current trends. You can write off short-term negative market disruptions, such as when a company deals with the public by delivering bad news like poor quarterly earnings, remarks Tommy Shek.
More precisely, you view market fluctuations as an opportunity to get quality shares at a discount. A passive investing technique allows you to feed your portfolio with continuous money instead of trying to act based on the market conditions. You follow a set process or discipline without getting overwhelmed by the performance of your stocks that exceeded or fell below expectations.
Trading
Trading is more like gambling than investing. Instead of focusing your attention on understanding the business and looking into the fundamentals, trading will lead you to pay more attention to what other people are thinking. Short-term price movements can attract your focus. You would want to time your investment (selling or buying) to make the most of the current situation. Essentially, stock behavior determines your next step. Your holding period may vary as per your personal goals. Usually, a trader holds a stock for a day, a couple of weeks, or months. But that primarily depends on the market behavior. Even though traders follow certain basic things, they remain more bothered with their earnings and losses.
Tommy Shek says, when it comes to deciding between the two options, some may recommend trading because of their expectations of high and quick returns. But investing seems to be the best option for nearly everyone. With trading, you can lose everything in a single day, and all your profits can get wiped out during the most volatile market periods. Then, there can be some days when you don’t get time to follow the market, and those days may have specifically done exceptionally well. Hence, you miss the bus. And not to forget, with every profit, you also run into tax liability.
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