Stock Trading vs. Investing: Which is Right for You?
It is a common misconception that online stock trading is the same as investing. This is an easy mistake to make, and people do it all the time. There are some very fundamental differences when it comes to deciding between trading vs. investing. Before you spend a dime, make sure you know the difference so you can choose which one is right for you.
When making a decision between stock trading vs. investing, the first thing you must consider is what you ultimately intend to do with the money you put into the market. An investment is intended to last for a very long time. It is something you put aside for retirement. It is not to be cashed in until some point far down the road. More than a year should pass before you even consider liquidating the money.
Stock trading, on the other hand, is short term. This is what brokers do every day. This is what you do if you are trying to truly play the market. Any money you use in this way should be cashed in between one day and six months in the future, no further. It is not meant to be a vacation fund, a nest egg or a college fund for your child. It is meant to be much more fluid than that.
How to Choose Between Trading vs. Investing
The first thing you have to ask yourself is how much time you intend to spend doing research. When picking between trading vs. investing, you need to know how many hours you can devote to reading charts, looking at graphs and checking out the fundamentals of companies. If you can spend a marginal amount of time doing the background research on a corporation, and you only want to do it once, you are better off going with long-term investing.
If you really want to get your hands dirty and spend a lot of time doing research, you are ready to truly play the market. Make no mistake, it is a lot of work combing through financial statements, company growth, history, background as well as future projections. Be prepared to treat it as a part-time if not a full-time job. When choosing between trading vs. investing, only the people who want to devote lots of energy and man hours should consider playing the market.
Even if you have not decided which way you want to go between trading vs. investing, you start both the same way. You have to do some research. In both cases, you want to make sure that the company you are going to put your money into is not going to collapse before you can collect your return. You want to check a company for a solid fundamental foundation. This means finding consistent profit, consistent growth and a quality financial background that extends back several years.
The way to do this is very hands on. You want to find out about the management structure of the company, where it ranks in its industry and what projects it has in research and development to determine how bright its future is.
Often, doing this research will make the trading vs. investing decision for you. If a company seems like it is going to continue to get bigger and reap more profits, you can buy in and just let your money grow as the company does. If it seems like the company moves in spurts, it is better to use it for the short term, keep a watch on it and jump ship as soon as the next burst of profit happens. The more research you do, the easier the decision is to make.
It can sometimes be hard to tell the difference between trading vs. investing. The initial act – buying stock – is the same no matter which one you are doing. Just make sure you know which one will meet your goals. Above all, make sure you do the research rather than follow your gut, or you will end up chasing rainbows, throwing away long-term companies too soon or holding on to short-term companies until you actually lose money.