The Difference Between Investing & Trading

[Note from Timorous: As is often the case, Cramer is close, but not quite right with his distinction between trading and investing - where he gets it wrong is in saying the difference is primarily one of time frame.  In fact, the difference runs much deeper: traders look for a price move in their favor, regardless of time frame, while investors are looking for value from ownership itself.]
Published: Tuesday, 30 Aug 2011 | 7:13 PM ET
“Not all Wall Street gibberish is deceptively complicated,” Cramer said Tuesday. “Some of it is deceptively simple.”  Case in point: The idea of investing versus trading.

A lot of people use the terms interchangeably, but they shouldn’t. At least on Mad Money, they carry very different meanings. An investment is based on a long-term thesis, while a trade is any stock purchase made to profit from a short-term catalyst. Mixing up the two can cause some serious damage to your portfolio.

Only buy a stock as a trade when you know there’s some future event that could drive its stock price higher. Maybe, if we’re talking about a pharmaceutical company or a biotech, it’s the release of positive clinical trial data. Whatever the catalyst, though, the strategy is to game that news and, hopefully, take profits after. But even if the plan doesn’t pan out and you lose money, Cramer said, you must take profits once the catalyst has past. The biggest mistake you can make is to turn a trade into an investment.

On the investing side, you might see some short-term declines, but that’s OK. The goal here is to bank profits over the longer term. So those dips are just a chance to buy more of the stock in question, provided you still believe in the thesis that brought you to it in the first place. And if the stock should rise in price, don’t take your money and run. Should your thesis hold true, there will be still more good news ahead for the company.

Cramer made this last mistake himself with Apple[AAPL  377.29    -3.74  (-0.98%)   ]back when it was trading at $26. The share price jumped $5 and he took profits. Yup, at $31 he cashed out.


(Written by Tom Brennan; Edited by Drew Sandholm)

When this story was published, Cramer’s charitable trust owned Apple.

Friday, September 2nd, 2011 Evergreen, Jim Cramer, Stock Trading

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