Understanding the difference between investing and trading can make a huge difference to your future wealth. It could be the difference between losing everything and building a pot of money you can eventually live off.
Let’s start with trading. Trading mainly involves dealing in stocks and shares. You may get a supposed ‘hot tip’ about a company, you buy shares in that company in the hope they go up. You watch closely as the price of the share goes up and down. Then within a few days or months you either a) sell the shares because the price has in fact gone up and you have made money or b) sell the shares because the price is falling and you don’t want to lose any more money than you already have.
The key thing here is that trading is generally short term, highly focused on one company or sector and is similar to ‘gambling’. Dealing in stocks and shares on a regular basis is not investing and it is important you realise this.
Say you go to the casino for a night out, you take £200 with you and are prepared to lose it all on the basis that you will have a good time enjoying yourself in the casino. There is nothing wrong with this and it’s the same with trading. As long as you are clear on the amount of money you are prepared to lose by all means have a gamble, but gamble is certainly what you are doing. There are so many factors that move share prices and most of the professionals don’t make the right calls most of the time.
Investing however is very different. It’s the boring way to make money!
Investing starts with having a clear objective in mind e.g. I need £100,000 in 10 years time to help me buy my dream house. You then decide how much you can continue to contribute and decide on a level of risk you are willing to take. You then invest into a diversified portfolio of different assets e.g. property, shares and fixed interest. You then sit back and let it do its thing. This could be for years!
What you will find is that your investment portfolio will go up some years and down some years but the longer you leave it the more chance it has to grow and at a lot less risk. Stress free, simple!
Helping you identify the difference between investing and trading
- Are you buying and selling shares on a regular basis each year? Yes = trading.
- Do you get a buzz from making a quick gain on a share or get depressed when you pick a share and it doesn’t work out? Yes = trading.
- Are you constantly reading the financial magazines searching for the next hot tip? Yes = trading.
- Have you placed money in a fund that is diversified across hundreds of companies and not looked at it for a few years? Yes = Investing.
- Do you use the services of a financial planner? Yes = Investing.
Summary – The benefits of understanding the difference between investing and trading
- Trading is higher risk than investing, there are significantly more chances of you losing money.
- Investing is a lot less stressful than trading.
- Trading takes a lot of time to research companies and to check performance every day. Investing gives you the most precious resource back ….time.
- The goal of investing is to build wealth over an extended period of time.
- The goal of trading is to outperform buy and hold investors by frequently buying and selling stocks and shares.
Trading is not a bad thing as long as you know you are doing it and are aware of the risks involved.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
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