Think of the difference between trading and investing as buying a house. Some people may buy a house, quickly fix it up and sell it. They hope to gain a quick profit after their expenses. This “house flipping” would be trading. Another person may buy the same house, quickly fix it up and rent it out. Their ongoing returns would be the regular monthly rental payments minus the mortgage payment and other ongoing expenses. They hope that their biggest gain is achieved when they sell the house five years later. This would be investing.
Even long-time market participants confuse trading and investing. While the line between the two can become blurred, trading usually entails holding an investment for a very short time and trying to benefit from the market’s short-term over or under pricing of a security. Investing is holding an investment for a long time to benefit from the underlying performance of the asset that underlies the security. This would be a company in the case of stocks.
The exact periods of long-term and short-term in the investment world can be vague. Some traders will hold a investment for minutes while others will hold it for a couple of weeks. The trader holding a security for minutes might view the trader holding the security for weeks as long-term. So, periods can be unclear.
Usually, an investor will hold a security for a year or more. The investors interest is to benefit from the performance of the asset behind the security. For example, an equity investor might buy a stock while a company’s financial performance is poor anticipating a recovery of the company in a year or two. By holding through this period, the investor hopes to benefit from management’s ability to turn the company around. The investor hopes to turn an inexpensive purchase into a solid performing investment when the general market realizes the “true” value of the company.
It is important to know the difference between trading and investing. Market participants who don’t realize which ones they are run a significant risk of losing their capital
Be smart, be well-read, be aware and be successful.
"The stock market is designed to transfer money from the active to the patient."
-Warren Buffet
