Investing vs. Trading

For the most part, the two words seem interchangeable; investing is trading and trading is investing. Unfortunately, that’s not exactly the case. Trading is very different from investing. 

Trading

Trading is usually short-term, there’s day trading where you do not hold any positions after the market closes, meaning you close all your positions before the market closes every day and never carry any positions overnight. Swing trading is another style of trading, it is still fairly short-term compared to investing, however, swing traders do hold positions overnight for weeks even months sometimes. Trading does not focus as much on finding undervalued positions, it focuses on technical analysis as opposed to fundamental analysis, like in investing. Technical analysis focuses on the trading based on market trends and statistics of the market. Technical trading involves price chart analysisprice and volume statistics, and much more to determine the strengths and weaknesses of a security. Technical trading requires a less overall understanding of the market and economy and can easily be learned and replicated.

Investing

The idea of investing is typically long-term. Investors focus on the long-term aspects and generally they follow the same ideology as Warren Buffet which is value investing. In value investing your goal is to find investments that are undervalued either according to the market or according to your own research of that company. Investing is not limited to the stock market, investing can apply to stocks, real estatebusiness and more. Investing can also be done through loaning or debt manipulation, such as giving loansbuying bonds, etc. Regardless if you’re investing in the market or in real assets, investing usually focuses on long terms of at least a couple years all the way to 50+ years depending on the goal or goals of the investment. So a big part of investing is valuation, and making sure that you can correctly determine the value. 

Use a valuation method, such as the Discounted Cash Flow Analysis, to determine what you believe the value of the company is and will be in in the near future. The Discounted Cash Flow Analysis is one of the most popular valuation methods because it focuses on the cash flow statements of each company which are the easiest to work with for valuation purposes. After you’ve determined the price that you believe the company is worth you compare it to the actual price of the company now or in the near future in the market. Your goal is to find companies that have a valuation price below the market price. Do not change the numbers in your valuation to try and get the price to undervalue, so the valuation with realistic numbers and estimates and if it’s not a good investment do not force it just move on to the next opportunity. 

If you’re interested in learning more about investing, go on to our next article How to Start Investing in The Stock Market.

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