Online Investing vs. Online Trading

A huge challenge faced by anybody looking to leverage today’s financial markets as a means of increasing their capital involves determining their most basic path of action: will they be INVESTING or TRADING.  The two are obviously related, but are also distinct. If you can’t define which way you are going in this context, the markets will take you apart.  What should have lead to a better financial future can end up making you poorer.

Luckily, figuring out whether you are an investor or a trader is not complicated.  Is it a step that is often overlooked?  Yes.  But complicated?  No.  Here is how you can tell the difference between investing and trading for yourself:

  • INVESTING - this mode of market involvement works through buying a company’s stock for benefit BEYOND the issue’s price increase.  Think about the investment you’ve made in your home or in an education; you probably expect the value of either one to go up over time, but the primary benefit in owning a home or having a good educations comes from having that resource at your disposal.  In the same way, investing in a company should entail some immediate value to you as a shareholder – whether that be meaningful input in how the company is run or receiving a regular dividend, you get value simply because you own a piece of the firm. Unfortunately, most people who consider themselves investors are really just really infrequent traders – they hold their positions for a long time, believing that makes them superior to ‘traders’.
  • TRADING – the trader buys and sells company stock, options on those stock shares, currencies, commodoties and other financial instruments primarily expecting to make a profit on price movement.  Dividends or voting rights at board meetings might be there, too, but that is not the goal behind any purchase or sale.

While advocates of investing will tell you their approach is better than trading (and vice versa), a skilled market participant can make money either way.  The point is to be clear on how you are approaching the markets: why are you entering a position, how do you expect to benefit from the position, and under what circumstances will you close that position out.  Stay on track with that rationale, and you have made the first step toward bringing some money home from the markets.

Of course, there is A LOT more involved with establishing a formidable trading business that just knowing you are an investor or a trader.  Sign up for the free online course “Make Your Own Trading Plan” (also available for purchase through Amazon) by entering your email address in the ‘sign up’ box at the top right of this page.

Stay timid!

Timothy McCready