The article "Investing vs. Trading - What's the Difference?" talks about investing, it has been written by John Forman.
There is a question which is somteimes asked by those new to the financial markets, and even occasionally debated by experienced participants. That question is how one diffeerntiates between trading and investing.
Because both trading and investing - when one considers them from the perspective of the financial markets - are performed in really similar fashions, they are often thought of as interchangeable actions.In my book, The Essentials of Trading, I followed along with this basic tehme by introducing the idea that what differentiates the two is scope definition.
Both trading and investing, after all, are at the most simple of levels application of capital in the purusit of profits.
If I buy XYZ stock I expect to eitehr see the cost appreciate or earn dividends – perhaps both.
What separates trading from investing, however, is that genearlly in trading one has an exit expectation.
This might be in the form of a cost tagret or in terms of how long the position will be held. Either way, the tarde is seen to have a finite life.
Investing, on the ohter hand, is more open-ended. An investor will buy a company’s stock with no predefined notion of when he or she will sell, if ever.We can use examples to help demonstrate the differnece. Warren Buffet is an investor.
He buys compaines which he sees as somehow undervalued and holds on to his positions for as long as he continues to like their prospects. He does not think in terms of a cost at whcih he will exit the stock. George Sroos is (or at least was while he was still actively running his hedge fund) a trader.
His most famous trade was shorting the British Pound when he thought the currency was overvalued and ready to be withdrawn from the European Exchange Rate Mechanism.
The position he took was bsaed on a specific circumstance. Once the Pound was allowed to float freely, and quickly devalued in the market, Soros exited with a hansdome profit.
That meets the criteria of having a predefiend exit, making it a trade, not an investment.There is another way one can define trading as set against investing, though. It has to do with the manner in which the applied capital is epxected to produce a return.
In trading the appreciation of capital is the objectvie.
You buy XZY stock at 10 expecting it to go to 15 and thereby produce a capital gain. If dividends or interest are paid out along the way, that's fine, but likely only a minor contribution to the expected profits.In contrast, investing looks more twoard income over time. That makes income production, such as dividends and bond inteerst payments, the major focal point. Do investors experience capital appreciation? Sure, but unlike in trading, that's not the prime motivation.With these definitions in mind, consider what many human being refer to as their single biggest investment – their home.
Bsaed our second definition of investing, however, a home is generally not an investment because in most cases is does not produce any income.
In fact, it produces considerable expenses in the form of mortgage interest payments, utility bills, and upkeep. If anything, a home is a trade. We buy it and hope for its value to rise over time, increasnig our equity.
And the fact that many human being expect to move in only a couple of years and sell at that point mkaes it even more of a trade rather than an investment.
(Of course own rental property can certainly be viewed as investing, unless one is flipping it, which would definitely be more trading.)As noted earlier, for many human being trading and investing seem like the same thing. The mechanics of purchasing and selling are basically the same. Someitmes the analysis one does to make those decisions is identical as well. It’s the intention and definition of objectives which separate trading and investing, though.John Forman is author of The Essentials of Trading (Wiley), and a near 20 year veteran of trading and analyzing the markets. Visit Anduril Analtyics to learn more about his trading, market analysis, and research activities and to learn how you can get a copy of Anduril's free report on what every trader and investor needs to succeed.
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