Wealth Building 101: Pointing Out The Differences Between Trading And Investing
By Dennis Gatto
Very often, when people start thinking about ways to make a little extra money, they think about investing. More specifically, they start thinking about stock market investing, because nowadays it’’s very easy to get started with online trading. They say that they want to invest in the stock market, but in reality, what 90% of them mean is that they want to trade in the stock market. There is a basic difference between investing in the stock market and trading in the stock market.
When you”re investing in the stock market, you”re looking for companies to own, either so that you can profit from their growth, or from the dividends they pay, or from both. You take a stake in the company and you”re hoping that it will generate profits and make your choice a lucrative one. You do sell stock, but only when the stock is under-performing and you want to get rid of it, or when you”re re-allocating your portfolio and some stocks just don”t fit the new profile anymore.
On the other hand, trading is all about buying and selling, trying to apply the famously simple advice of buying low and selling high, even though this is easier said than done. Trading is a method used to generate quick gains, and the logic of picking stocks to generate those gains doesn”t necessarily involve that company’’s fundamentals nor its ability to make a profit. You spot something that makes you think a stock is going to move in one direction or the other, and you act on it with the hope that you were right and will turn a profit on the transaction.
I don”t think there’’s one strategy that’’s better than the other, and I also think it’’s a bad idea for someone to engage only in one and leave the other out of the picture entirely. There’’s lots of money to be made using both strategies, and quite frankly, a balanced approach provides the best of both worlds. For example, there are very volatile companies out there, but for which you can spot the trends and have a pretty good feeling whether they”ll be heading up or down. If you have the information, it’’s worth it to take a limited risk, in an attempt to earn a quick return. Conversely, there are some stable, profitable companies out there that you should definitely have in your portfolio for long-term purposes.
Like I said, there’’s no one strategy that is inherently better than the other, as people have been making money using both. If you want to put some money in the stock market, you need to clearly establish the difference between trading and investing when formulating your plan and setting up your strategy. This is what’’s going to make you a winner in the stock market.
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