The Difference Between Trading and Investing
By Dale Gillham | Published 18 March 2018
Every week we get hundreds of people contacting us about getting into the stock market. Some are beginners, some have a little experience, while others have been in the market a lot longer and all fit into one of two categories.
Either they do not know where to start investing or trading or they have gone down the wrong path to achieve their goals and are struggling. For the most part, we find that people do not understand the market or what is required to be profitable.
We also find that people, through listening to the financial world, the media and others, have a very wrong perception of what investing and trading is. So let's sought this out today.
Trader or investor - which one are you?
Investors come in two forms: the first is the buy and hold investor who simply purchases some stocks and leaves them alone for the long term.
They may have used a stock broker or financial professional to assist them in selecting the stocks, but in my experience it is highly likely they read information somewhere and made their purchasing decisions this way. Basically they have little or no knowledge or strategy and they practice what I call the buy and pray method. Unfortunately, this is why so many portfolios perform very poorly.
Then we have the active investor who is very much like the passive investor, however, they spend more time selecting stocks and adjusting their portfolio in an attempt to increase the returns they might get from being a passive investor. The active investor will also get their information from the same sources or they may subscribe to some regular stock tipping report.
Again, they are largely making decisions with little or no knowledge or strategy. That said, most tell me they have a strategy, and when I ask them to explain it, they are unable to articulate it properly.
Now let’s talk about the traders or those who believe they are traders.
Before I do, there is an old saying that roughly goes like this. The illusion of knowledge is more dangerous than not having it. In the stock market the majority of those who call themselves traders fit into this statement, which explains why 90 per cent of traders are not successful long term.
Traders also fit into two categories: the first is those who believe they are traders and those who actually are.
The word trader implies something. In the business world, every business that has revenue and costs is said to be trading. You can be running any business selling all manner of good and services with the end goal being to have a product that you sell for more than it cost you.
In the world of the stock market, the word trader is bandied around too much and in the wrong context. The word trader implies you are a professional, and yet all they have done is open a brokering account and bought some stocks, very much like an active investor. In my experience, I would not consider them to be traders because they have no training, skill or strategy.
Are you trading to win or trading not to lose?
We then get into those who are traders and again there are two types: those who trade to win and those who trade to not lose. Let me explain.
Those who trade to not lose go to free courses, surf the web for hours on end and may even read a few books. Basically they are attempting to become a professional to supplement or replace their income yet they resist doing what they know they should. Meaning they think that by not paying out money to get a good education and the right tools, they would somehow magically become a trader.
Free courses are free for a reason and it is not because they give you a great education. In my experience, all of the traders I speak to in this category say they are inconsistent, confused and conflicted.
This brings us to the traders who trade to win. These people know that you need to treat trading as a profession and not a hobby and this requires the right education, knowledge and skill, not just any education and a halfhearted effort.
These traders know that in order to succeed, they need to earn the right to make the returns as success is not achieve by chance but rather by choice.
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