by Sam Seiden, Online Trading Academy
Online Trading Academy Article of the Week
The past two weeks I have been trying to open your eyes to all the trading risk and challenges that you will likely face in your quest to profit from the market. This week, let’s keep that theme going with another twist in the winding road to financial freedom.
What’s the Difference Between Trading and Investing?
The other day, I was spending time with a friend of mine I have known my whole life. He has always been interested in trading, and over the years I can tell his interest is growing. Recently he asked me a simple question:
“What’s the biggest difference between trading and investing in the markets?”
It’s a challenging question with a simple answer so let me start with my version of the high level answer: “nothing”. Whether you are a trader, an investor, Nike buying advertising space on TV, a car dealer, franchise owner, street vender, someone who buys and sells things on E-bay and so on, you are taking the same action hoping for the same result. You are trading a certain amount of money for an expected larger end sum of money. The trader takes on risk in a market for a potential reward. Nike pays for commercial time on TV (risk) expecting to see a return (reward) on that investment much greater than the cost of the commercials. The retail store owner buys inventory (risk) in hopes of selling that inventory to you and I at a much higher price (reward) than what they paid for it. I think you get the point. The only difference is most people associate the word “trading” with being in the market for a short period of time and “investing” with being in the market for a longer period of time. Other than that, there is no difference between trading and investing.
The more important question is, are you taking on risk when the odds are stacked in your favor or taking on that risk when the opportunity “feels” right and “looks” good? Though there is no real difference between a trading and investing, the word “investor” carries with it the perception that you should be hands off and the stock market always goes up so don’t worry about it.. If you are an investor who risks your investment capital on the ebb and flow of the stock market, you’re expecting the market to rally an average of at least 5% a year during your investing years prior to retirement; but that is a very risky assumption. This and many other faulty perceptions around the word “investor” leads people to believe that investors are not and should not be traders. This is why most people live their life and never achieve their financial goals. Everyone has the ability to put their hard earned money at risk only when the odds are very much stacked in their favor, when the risk is low and the reward is high. The challenge is that most people don’t know this and even fewer know how to do it.
Most investors can’t tell the difference between risk and opportunity and don’t even know to think about it. In fact, most get it completely backwards which is scary and sad. This novice group continuously falls for the illusion trap that disguises risk as opportunity. People tend to either not want to put in the hard work it takes to develop the market skills needed or, again, simply don’t know there is opportunity to do so. There are no short cuts. If someone is not interested in putting in the work it takes to attain proper trading and investing skills, profitable opportunities will equally not be interested in them. The most rewarding opportunities always go to those who put in the time and work.
Notice, I keep associating the word markets and investing with Stock. My mind doesn’t see it like that but I do that because the average investor’s mind does. Whether a trader or investor; the astute market speculator has many more markets than just the stock market to manage risk and opportunity. When the stock market goes down for example, money doesn’t just evaporate, it goes somewhere else and the astute market speculator knows this.
In the world of “compensation”, over time you will get exactly what you deserve. Life and the markets have a masterful way of evening the score. Your pay-back is eventually equal to your decisions and efforts. If you’re not motivated to develop the needed skill set, you will likely transfer your account over to someone’s account who is. I have been in this business for many years. Trust me, if there was a short cut to financial success I would have found it.
You see, whether you are a trader, Nike, the retail store owner or one of the others, all that really matters is the type of speculator you are. Those who invest the time and energy required to attain a rule based strategy that offers them low risk / high reward profits simply get paid from those who don’t. I didn’t create the system, it’s how the world works. No one is pushing you to put your hard earned money at risk. I am simply warning you that the only difference between trading and investing is perception. In reality an investor should still be managing their portfolio like a trader; but make sure you’ve developed the proper skillset.
Hope that was helpful. Have a great day.
