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Trading vs. Investing – Which Do You Do?

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Better in the Dark

This is a guest post from Robert Farrington at The College Investor.  He seeks to help young adults and college students get started investing, and has a great Investing 101 resource.  Though Robert’s audience is a bit younger than many of the readers of this blog his insights are useful to investors of all ages and experience levels in my opinion. 

When you describe yourself and your financial future, do you see yourself as a trader or an investor?  Did you know there was a difference? It’s true, they are often used interchangeably, but they are quite different.   And knowing yourself and the difference between the two can help you understand where you’ll be successful in the future.

Trading is Different From Investing 

Trading and investing have a major difference, and that difference has to do with time. If you are trying to multiply your money over the course of 30 or 40 years, then you are most likely investing. If, however, you are interested in buying a stock today and selling it tomorrow if it jumps a point or two, then you are almost certainly a trader, and not an investor. Trading is often a very short term action, while investing is performed over the long term.

While the terms are quite different, one can perform a trade while still being an investor. For instance, if you have a 401(k) account that isn’t performing as well as you’d like, you might decide to change your overall investment strategy and you would do this by making some trades. You would sell off the shares that no longer matched your investment plan and then you would purchase some new ones that do. With this, you would be trading in order to fulfill the long-range goals of your overall investment plan.

Give Into Temptation 

I think there’s a little piece in all of us that is intrigued by risk and excitement. This is why some people like to skydive and others like to swim with sharks. Still others love the thrill of a short-term trade built mostly on speculation.

We all have our investments, but you know what? Nobody talks about them. Why is that? Because they’re boring. What would we say? Something like, “My portfolio increased by 5.6% last year…” And that would most likely be the end of the conversation. But, what if you decided to make some trades and possibly make some short term cash? You story would turn into, “I evaluated the economy and I realized that this particular stock was undervalued, so I bought 100 shares and they just skyrocketed! I made $1,000 in just a couple of days.”

Because there’s a little need for risk and adventure in all of us, I say give into your temptation….in moderation. You definitely should not risk your entire investment portfolio, but feel free to use a small portion (something like 5%) and trade it as you wish. This will ensure that 95% of your portfolio stays safe within your planned strategy, but yet you can still have some fun with the 5% by making trades and taking a few risks here and there.

Making Trades

If you do decide to take a little risk and make some trades, there are a few basics you should know. First of all, most every trade carries a fee. So, if you sell a stock to make $5, but the trading fees were $10, then you actually just lost money.

Secondly, decide which trading method is right for you. Are you a fundamentalist or a technical trader? Meaning, do you trade based on the movement of the share price or are you making trades because of a certain ratio (like the debt-to-equity ratio, etc.)? Find out what makes sense for you and have a good time.

If you plan on trading at all, you need a strategy, and you need to stick to it.  Just like investing!  Invest in what you know, but also trade in what you know as well.  If you are interested in trading in a certain area of the market, say currencies, but aren’t knowledgeable step back, take an investing course, read up, and maybe use a practice account before you go for it with real money.

Final Thoughts

For some people, trading can be fun, but it’s just too much uncertainty and risk.  Just know that it’s not for everyone. If you aren’t comfortable with it, then don’t do it. But, if you feel like it won’t take over your life then maybe you want to give it a shot. Happy investing!

This was a guest post from Robert Farrington, from The College Investor.  He seeks to help young adults and college students get started investing, and has a great Investing 101 resource.  

Please feel free to contact me with your investing and financial planning questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

Please check out our Resources page for links to some additional tools and services that might be beneficial to you.  

 Photo credit:  Wikipedia

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Comments

  1. JoeTaxpayer says:

    5% is probably the amount I’d say I ‘trade’ with. Some stocks that for no reason seemed to sink below where they belong. A few weeks back one such stock traded at $7.90. I was willing to hold it long term, but said my target was a $2 profit and it touched that $9.90 sell order today. With nearly 95% invested long term, mostly S&P ETFs, I call myself an investor. My goal is S&P-.06, and that’s good enough for me.

    • Keeping to 5% is probably very smart. What happens when your 5% grows from good trades? Do you let your “play” money get bigger, or do you move some of it over into your long term investments?

      • JoeTaxpayer says:

        I wish that were a concern. My brilliant trades average a bit less than my indexed S&P-.06. If over the decades (I am 50, and have been investing since 18) I actually thought I’d beat the market long term, I wouldn’t be such an indexer. Good luck comes in streaks as does bad.

  2. I’m definitely more of an investor at this point. If I get a large enough portfolio to devote 5% to trading, I’ll love to try it out. I wouldn’t want to do that too often though because it’s risky and could screw up our long-term plan.

  3. Matt Becker says:

    I don’t do any trading. My strategy is incredibly boring, through hopefully very successful. I own for different mutual funds, all indexes, and my only trading revolves around buying more shares and rebalancing when things get out of whack. Not exactly great dinner conversation, but I love it.

    I do like the 5% limit on trading, though again it doesn’t really interest me. I understand why some people want that action though and I think a small portion like you say is fine. Just be careful not to let some early returns make you overconfident so that your “play money” starts creeping up to 10, 15, 20% and beyond! I’m sure it happens.

  4. There are many ways to make money. Trading and investing are some of the most popular activities to make money. I have heard from many people that they like investing more than trading.

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