Before everyone starts their work in the stock market, the question arises — what strategy of behavior in the market to choose, trading or investing.
In this article, we will look at the following questions:
- How do traders and investors work
- Weaknesses and strengths of trading and investing
- What determines success in investing and trading
How does a trader work?
Trading and investing are mostly two opposite behavior concepts in the stock market, while both directions have their supporters. Trading implies the full involvement of the participant on the stock market and mean:
- Monitoring of the price throughout the entire trading session
- Placing a large number of orders
- Making a large number of transactions
How does an investor work?
Investing is an alternative to stock market trading. When investing, small short-term and medium-term fluctuations in the stock market are ignored, and long-term ones are used. These are global trends for companies that can last for years. As a result of such fluctuations, quotations grow by tens, hundreds, and sometimes thousands of percent.
Many of those who are actively interested in the stock market are well aware of the names of the most successful investors. Warren Buffett, Jim Rogers, George Soros, and many other famous investors have reached the highest levels of success, precisely through investing. Yet, at the same time, few people will remember the names of the great and wealthiest traders.
Pros and cons of trading
Undoubtedly, the trading approach has many strengths and advantages and some points that complicate this process.
Pros of trading
- Potentially, in comparison with other types of behavior of market participants, trading provides endless opportunities. It allows you to work in the stock market and get a much higher profit than any alternative method. Of course, the primary key to trading lies in the unique trading strategy that each trader develops independently, but potentially such success is certainly possible.
- Traders use completely different market movements, both medium-term and very short-term, upward and downward price movements. All this allows traders to be completely independent of market conditions. It does not matter at all whether the market rises or falls. The trader has the opportunity to make money on any market movements, including downtrends.
- The benefit of trading is high capital mobility. The results in trading are visible very quickly, which allows you to promptly manage the capital involved in trading, increasing it and reducing it when it becomes necessary.
Cons of trading
- One main problem of trading is time, or rather its complete absence from the trader who decided to work on the market in this way. Trading is entirely riveting for the entire trading session, which lasts a whole day.
- Trading is an extremely highly competitive process in which it is not so easy to achieve good results. A chosen and seemingly reliable trading strategy can work well and be profitable up to a certain point. This often gives the false confidence that this will be the case throughout the entire time. But there comes the moment when the strategy suddenly fails.
- For traders, the brokerage commission is very critical, and in general, much more depends on the broker’s work for the trader than for the investor.
Pros and cons of investing
Investing is, in many ways, the opposite of the process of trading. However, it turns out that many of the trading weaknesses are the strengths of investing and vice versa.
- One of the primary key benefits of investing as opposed to trading is time. Investing can save the participants’ time as much as possible and combine work on the stock market with other activities. So this is precisely passive money management when you do not work for money, but money works for you.
- From a decision-making point of view, making an investment transaction does not require gigantic mathematical and statistical calculations. Instead, the investor makes a decision based on an analysis of its financial statements and its investment assessment.
- Investing does not have such a strict requirement for asset liquidity. Therefore, you can buy quite rare shares that do not have high trading volumes for investment purposes.
- Strategies based on a long-term investment approach are almost wholly indifferent to brokerage fees. When investing, you make the minimum number of transactions and rarely when the investor’s capital turns over more than two times in a year. So the brokerage commissions will be minimal.
- Investment has no restrictions on the amount of capital to be placed. When the investment capital is substantial, investors already acquire some conditionally small amount of the company’s shares. At the same time, they can collect significant shares in companies, which may already give them the right to manage companies. Like Warren Buffett, whose company Berkshire Hathaway participates in handling almost all of his significant acquisitions.
Cons of investing
- The primary disadvantage of investing is the time it takes to bring results. If we buy an investment-attractive company and expect the stock to grow in a day or not, then the performance could be zero percent. If we expect growth over the next six months, then the probability of growth could be about 20-30%. But if our expectations are on the horizon of three or ten years, then the probability of growth will reach 80%, 100%, and even more.
- Successful investing is not an easy process. Although it can show that many investment ideas lie on the surface from the outside, they can be gleaned from open and accessible sources. So investing can be done without any preparation. However, this is not the case since nuances play a decisive role in a successful investment.
Success in trading
Of course, any strategy of behavior in the stock market, both investing and trading, can be successful. But before you decide which way to work in the stock market, it is essential to understand what is necessary for the successful implementation of the chosen strategy.
In trading, there are three key components of success:
- Building a formalized trading system of rules and checking the effectiveness of them over a long history.
- Availability of certain mental attitudes. Risk tolerance, formidable ability to follow trading discipline no matter what, high-stress resistance, and many other qualities necessary for effective trading.
- Trading will require complete dedication and immersion in the process over time. Only with such an approach can a fair return on trading be expected.
There are also three critical components for investment success:
- The knowledge from which the investor makes correct assumptions and hypotheses in the stock market correctly evaluates its investment attractiveness and development prospects.
- The ability to wait and understand that results come fully over long investment horizons.
- The understanding that investing is not only the choice of specific assets. It is a system for forming a balanced portfolio that meets the investor’s specific investment goals and needs and implies protection from various risks.