Many people use the terms “stock trading” and “investing” interchangeably, but they describe different courses of action. Both investing and stock trading are attempts to earn profits in the financial markets. However, there are differences in degree and strategy. Investing is considered safer and often involves buying real-world commodities such as real estate and precious metals.
The goal of most investors is to build wealth over a lengthy period of time. Stock trading is more active, and traders hope to earn as much profit as possible on each trade. Most traders try to earn returns in a month that typically take a year with more conservative investments. For example, investors might be delighted with a 10- to 15-percent annual return. Traders seek to earn 10- to 15-percent each month to build wealth quickly.
What Traders and Investors Look for in Financial Opportunities
Investors look for relatively safe investments that deliver a predictable and steady return. Real estate and precious metals make good long-term investments because they usually appreciate in value over long periods of time, and their value never drops to nothing. Other long-term investments include fixed income funds such as federal, state, municipal, and corporate bonds. Long-term investors also invest in businesses and stocks that have a long-term record of steady growth.
Fixed income funds are regarded as some of the safest investments, and investors can consult bond-rating agencies to determine the organization’s credit worthiness from “AAA” to “D,” which means the company has a default on its record. Even a steady return can result in lower spending power if the inflation rate outstrips earnings. Investors who choose Treasury bonds can buy insurance protection against inflation that’s called Treasury Inflation-Protected Securities, or TIPS.
In any financial analysis, it’s important to consider the benefits of tax-advantaged and tax-free funds. The benefits of tax advantages add extra value to some fixed income investments.
Traders and Timing
There’s no guarantee with stocks, and traders risk losing their entire investments, but it’s more common to lose a percentage. Savvy investors diversify their portfolios to reduce the risk of losing on their investments. Some stocks might fail, but careful investing usually results in covering the losses and earning a profit.
Traders use four distinct styles of investing that include:
- Day Trader: Day trading is ideal for people who want to monitor their accounts attentively all day or feel compelled to do so. The stocks are always sold back at the end of the day, which reduces the time for losses and profits. Traders don’t have to worry about what happens overnight. The goal is to make a profit each day. If you’re inclined to work Wall Street market hours, this might be your best choice, but be aware that technology plays an important role in successful day trading.
- Swing Traders: Swing traders hold their stocks for a few days up to several weeks.
- Position Traders: Position traders hold stocks from months to years. These traders invest in companies that have a strong earnings record and bright outlook under current economic conditions. Some investors choose these stocks as well. Other investors invest in companies to gain a significant percentage of a given company and earn a seat on the board of directors.
- Scalp Traders: Scalp traders only hold onto stock for a few seconds or minutes. These traders use the speed of electronic technology to take quick advantage of temporary price swings.
Many traders use a hybrid approach and employ several styles for different stocks and industries.
How to Trade Like a Pro
The most common stock trades involve buying at a low price and selling at a higher price, but traders can also make a profit by selling at a higher price and covering the risk by buying at a lower price, which is called selling short. Buyers often employ a protective “stop-loss order,” which automatically sells off shares of a stock when it reaches a predefined level. Professional traders can use many tools to identify stocks to buy and protect themselves from big losses. These tools include:
- Technical tools that analyze market trends such as stochastic oscillators and moving averages that track stocks over different periods such as 20-, 50-, 100-, and 250-days
- Comprehensive research on companies because smart investors buy “companies” and not “stocks”
- Market newsletters
- Charting software
- Developing a professional approach that doesn’t rely on emotion
- Analyzing returns on equity
Emotions are dangerous when trading stocks. Thousands of factors can affect stock prices, many of which can’t always be anticipated. Picking a loser happens to every active trader, but that doesn’t indicate incompetence. Most traders who do their homework eventually profit as long as they don’t risk money they can’t afford to lose. You can handicap the game, but like any sports wager, stocks can cover the spread or fail for reasons that don’t make sense.
How to Invest Like a Pro
Successful investors usually avoid the stress of the stock market. Professional investors employ many techniques that traders should adopt when possible. These include conducting deep research on commodities, fixed income funds, real estate, and other investments. One of the most critical issues is return on investment, or ROI.
The best strategies of successful investors include:
Buy Multiple Investments
Any investment can experience temporary problems. Even fixed income funds that deliver a predefined amount of interest can lose value because of inflation. The best policy is to invest across multiple asset classes.
Match Investments to Your Objectives
Your goals define your investment strategy. Do you want to fund your retirement or pay for college educations for your children? Real estate and fixed income funds can provide reasonable returns without much risk. Do you just want to earn a steady return for a few years? Treasury bills and short-term CDs might be ideal investments. Are you worried about a possible economic collapse? Investing in precious metals, fine art, and jewelry could be a winning approach.
Avoid Rash Responses
It’s tempting to sell off assets when their value falls, but that’s how many investors and traders make money — buying solid assets that experience temporary setbacks. Most stocks bounce back after a decline. Investors generally show more patience than traders unless they identify a better bargain after a downturn.
Look for Underpriced Assets
Smart investors always look out for bargains. Falling prices can generate exceptional bargains for investors willing to wait out the downturn for prices to begin climbing again.
Develop a Strategic Buying Plan
Many investors use a dollar-cost averaging plan to invest a certain amount of money regardless of market trends. Regardless of your strategy, you should invest continuously even it’s only to upgrade real estate or put money in the bank.
Reconsider Your Investments Annually
No matter how “sold” you are on an investment, it makes sense to reconsider your strategy at least once a year. You can balance your portfolio or sell off assets that have fallen steadily in value.
Although it might seem as though traders and investors use radically different approaches, they share more similarities than differences. Using a professional approach, anyone can learn how to earn profit from trading or investing.