Trading Versus Investing - Which Is For You?
Trading. Investing. Two words sometimes used interchangeably. Does it really make a difference which one you use and when? For yourself it really doesn't matter - at the end of the day you are out to make a profit - money - coin - dinero - mula.. you get the point.
When you are talking to others however, stating what you are doing does help for clarity sake. Its especially helpful to someone new to the game. Newbies are often thinking … should I be trading? or should I be investing? Often their thinking is: Maybe I can INVEST in a penny stock by making a quick TRADE.
Well to be a bit pedantic.. investing is placing capital at risk due to acknowledgement of a mispricing event. Trading is placing capital at risk to a combination of factors all changing with the expectation of driving a change in price.
At the end of the day, this sounds like investors are fundamental analysts and traders are technical analysts. Well while there are no absolutes, this is generally the case. But more to the point, so who does better? Investors or traders? Now this is the interesting part. According to Jack Schwager (considered t to be THE investor/trader historian), author of Market Wizards and subsequent Wizard editions, those who have been wildly successful have used either approach.
His conclusion is that your approach is about your personality. "To thine own self be true" never rings more true when it comes to placing your money at risk. As a first step, you need to know your personality to know which approach is right for you. Unfortunately this may take some time because experience tells me you really need to put money at risk to flush this out. While paper trading is a good way to start, you need to go live to know for sure.
Learn some general theories and approaches of both investors and traders. If you are a beginner, start paper trading, then go live with a small amount to confirm your initial thoughts. If you are experienced, review your past success - can you benefit from some clarity and focus?
Are you a trader? Are you an investor? History says you can succeed either way, but understanding your personality and mentality will go a long way in helping you focus and executing a successful strategy for beating the market.