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The Difference Between Trading and Investing

 you about stock trading this would

probably be the image that comes to mind
the New York Stock Exchange trading
floor a scene synonymous with stock
investing itself this is where traders
meet in person to buy and sell stocks
finding deals for their clients and
employers and yelling tickers and prices
across the trading floor well this used
to be how most trading was done these
days you can do most of the work online
in advancements in technology have even
allowed everyday individuals to take up
trading at home to try and make money
but despite the fact that trading
involves stocks and other investments it
is often seen as a very different
practice from investing what you or I
probably do when we buy or sell stocks
you see being a trader
whether professionally or as a hobby is
different from being an investor and
while you've probably heard of people
making quite a bit of money off trading
it's an area that most people are best
served avoiding why will answer that
question and more on today's plain bagel
if you look at the literal definitions
of the terms investing in trading you
probably won't grasp the difference
between the two
after all investing is the act of
spending money with the hope of
generating some larger benefit or return
in the future while trading is the act
of buying or selling investments it's
not very clear how the two differ in
fact there is no technical distinction
dictating what counts as trading and
what counts as investing but the terms
are often used to refer to two very
different approaches to making money
from investments an investor is someone
who places their money in something and
looks to profit from that asset growing
over time whereas a trader is someone
who makes money in the short term by
buying and selling stocks frequently in
other words while one relies on gradual
appreciation the other focuses on market
volatility now being a trader can mean a
number of different things
many companies actually hire traders to
help them carry out their investment
decisions for example an investment firm
may decide they want to own shares of
plain bego Co so they'll hire a trader
to help them get the best price for the
shares in this video however we'll be
focusing on traders who operate with the
sole objective of making themselves
money and there are two main areas where
in this practice differs from investing
the timing of trades and the analysis of
stocks for timing as we mentioned
investing is typically a long-term
strategy whereas trading is more
short-term when you invest in a stock
you're betting that over time the
company will grow either by expanding
its asset base or its profits you can
invest in a company for as little time
as you want but generally speaking
you'll be aiming to sell the stock to
510 even 30 years from now on a day to
day basis the price of a stock may
fluctuate and indeed some investors try
to take advantage of that by buying when
the stock's prices abnormally low but
once the purchase is made the focus
tends to shift to the long-term movement
rather than the short-term volatility
training on the other hand is the fast
and furious approach it involves buying
and selling the investments to take
advantage of short-term price swings day
trading for example involves individuals
buying and selling stocks same day while
swing trading expands the process - of
few weeks months or sometimes years
there are other cells of trading as well
but they all tend to fall under fairly
short timeframes
sometimes even making buys and sells
within a matter of seconds because of
this trader submit many more trades than
investors and often cycle through many
more positions but selling something
shortly after buying it doesn't alone
make you a traitor so let's move on to
the second point of distinction the
analysis to understand how the analysis
of a company and its stock price varies
between traders and investors we first
need to explain the difference between a
stock's price and its intrinsic value
theoretically
the price of the stock only reflects the
number of buyers and sellers trading
that stock at that given point in time
and past the stock price there's some
intrinsic value a true worth of that
stock that only an omniscient being
would know over time the price of the
stock should track closely to this
intrinsic value as buys and sells
factoring company information known by
the investors but human factors like
fear or greed might lead a stock's price
to deviate from its actual worth from
time to time within the world of
investing people take two approaches to
this information passive investors
ignore short-term fluctuations in stock
prices and look only to benefit from the
rising intrinsic value knowing that even
if they do buy an overpriced stock they
should benefit in the long term as the
aggregate market grows active investors
instead try to estimate a stock's
intrinsic value so that they can buy the
stock for less than it's worth
allowing them to benefit not only from
the rise in intrinsic value but also
from the return of the price to its
intrinsic level well these two
approaches vary from one another they
both generally depend on the intrinsic
value of a stock increasing traders on
the other hand only care about the
stocks price there is no attempt to
estimate the intrinsic value of their
stocks and indeed many traders buy and
sell stocks without even knowing what
the company does looking only to take
advantage of the short-term swings or
trends in its stock price for this
reason it's common for traders to focus
their analysis on technical indicators
these are measures and gauges that only
take into account historical pricing
information
to help the trader determine whether
there's a developing trend or pattern
that they can quickly exploit it's the
graphs and charts you imagine when you
think of a professional trader sitting
in front of their four screens buying
and selling stocks now some traders do
incorporate qualitative information into
their research as well but it is usually
only to take advantage of a short-term
shift that they're expecting in the
stocks price for example if a trader
finds out that a company is announcing
news tomorrow they may decide to buy the
stock with the belief that the company's
announcement will be positive leading to
a jump in the stocks price in either
case traders generally only focus on
snippets of a company's information
rather than trying to develop a broader
understanding of the firm's operations
so those are the two primary ways
trading differs from investing it
requires a very different mindset it
operates in a very fast-paced
competitive environment some would even
argue that it requires a fair amount of
bluffing this was more so the case when
traders used to talk in person about the
stocks they wanted to buy and sell but
even today traders often try to hide
their true intentions when they submit
in order after all if you can convince
other traders that you don't want to buy
something you may be able to get it for
a lower price just like with anything
else
all of this can make trading a very
alluring practice for young investors I
mean competition fast trades quick
payoffs it's got it all and with all the
ads we see online of millionaires and
their private jets explaining how they
went from zero to hero with their $300
trading strategy it probably seems like
a fairly easy field to enter but trading
is a high risk practice most traders put
a lot of money behind their individual
trades sometimes even borrowing to
leverage their returns which exposes
them quite heavily to short-term
volatility of individual positions it
also requires a lot of effort in time
many trades only end up yielding a
fraction of a percentage point meaning
traders are continually rolling their
money into new positions and honestly
when it comes to amateur traders the
truth is there just isn't that much
working in your favour with such a
narrow time frame you're often forced to
make decisions on fragmented information
and when you consider that you're
competing with industry professionals
with Kobe
amounts of money cutting-edge research
and even industry best algorithms I can
trade faster than you can say the word
stock it's just not a fair fight now I'm
not saying you can't make money trading
there are people who make a full-time
living from their home with trading
activities in some companies even offer
salaried positions for traders like we
mentioned earlier so there are some
merits to the field but trading is a lot
like playing poker you can be very good
at it and indeed some people do make a
living from it but there's a lot of
chance involved with other great players
at your table
the odds are often not in your favor so
any advisor will probably tell you that
investing is the better way to go for
the average person like Harry no more
comprehensive research and holding over
the long term you're more likely to
benefit from the broad growth of the
economy and the stock market as a whole
sure you won't get that same rush as a
tripled levered buy on an out of the
money put option but that's probably for
the best after all if you're looking for
the rush of high-stakes and not so great
odds you may as well go to the casino at
least there you'll get free drinks
thanks for watching if you like this
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plain bagel my name is Richard coffin
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