The stock market is one of the many possible ways to invest your hard-earned money and could offer the most potential growth. It is often risky, but if you manage it right, you can take advantage of the market to secure financial position and your future.
But how do you actually start?
One of the issues that many newbies in the stock market find themselves confused with is their investment strategy. Knowing one’s logical and emotional capacity also helps in determining their investing style preference – whether they are good at investing or trading. It is essential for you to know which one is the right fit for you based on your financial goals.
THE STOCK INVESTOR
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett
In its simplest term, an investor is someone who believes in fundamentals of valuation over a long-term period. They often enhance their profits through compounding or reinvesting any profits and dividends into additional shares of stock.
Investing is suitable for individuals who aim to build wealth steadily over a period of time through buying and holding of investment instruments. It comes from studying the company’s fundamental background and a belief that the company will perform well in the future.
THE STOCK TRADER
The goal of a successful trader is to make the best trades. Money is secondary.” – Alexander Elder
Trading, on the other hand, is done by buying and selling of shares in a more often manner. Stock traders choose to buy and sell stocks in multiple transactions and in quick succession. They are much more concerned with the stock itself rather than the company’s growth and future plans. In trading, one must know that there are several types that comes with it, including position trader, swing, scalp, and a day trader:
Scalpers: This is a type of a trader who holds a stock for a few seconds to minutes at the most. They buy and sell many times in a day with the objective of grabbing small consistent profits out of the market. They are the busiest ones and those who have the focused time to monitor the market.
Day Traders: These traders do not hold a stock overnight. They usually buy stocks at the beginning of the market and sell it off at the end of the day. They are also not included in the ‘busy ones’ as they have the time to monitor the market throughout the day.
Swing Traders: The Tradable asset is held between one and several days by these traders in an effort to take profit from price actions or ‘swings’. Those who swing can’t monitor the charts during market time so they tend to buy first and then dedicate their free time to analyze the market and target sell conditions.
Position Traders: They are the ones who trade for the long-term that last for weeks, months, and even years. They do not trade actively and they based their trading decisions on a combination of fundamental and technical analysis.
SO HOW DO YOU KNOW WHICH ONE SUITS YOU?
We need first to assess yourself. It’s like getting prepared before you enter the battles. Here’s how it goes:
Are you here to invest in the long haul or just finding quick punts in the short term?
Time is important in determining whether you’ll go trading or investing. A trader usually allots time more frequently in the market. They have time to monitor the market movements and try to make a profit from it in a short period of time. Sometimes weeks, days, hours or even minutes.
An investor, on the other hand, prefers a longer period of time. After picking well-established companies to invest in, they’ll put their money there and hold it til the profits run. They don’t usually check the market because they are not affected by the market volatility. Ups and down are just normal.
As we all know, both have an accompanying risk. Just like when you go into the gym, you know and you expect that you’ll have to sweat many times before you achieve that fit body you are aiming for. The same goes with investing and trading.
Since an investor’s thinking is more is into fundamentals of the company, they then to think that holding a stock for a longer time is quite safe as it works on buy and hold principle. Investor tends to feel comfortable with low risk and low returns in a short period of time but might deliver higher returns through compounding interests and/or dividends if the chosen stock is held for a longer period of time.
Now let’s look at the case of a trader. A trader is expected to be exposed in market’s day to day fluctuations. They have higher risk and higher potential returns as the price might go high or low in a short while. There’s underlying risk for every trade that they execute as the more they participate in the market, the higher the chance of gaining or losing the capital that they are betting in.
This one’s you. You’re personality says a lot about how you are likely to invest and could even determine the investment type you are likely to make. Whether you are the aggressive, anxious, conservative, passive or the speculative one, you have to take a step aside and make sure that you acknowledge your investor profile adapt your investment strategy accordingly.
Wrapping up, investing and trading are entirely different methods but both depends on one common goal – that is to generate profit from the market and it is entirely up to you on what choice of strategy to use based on your time, risk management and personality.
No matter what the difference can make between these two, the most important thing is to have is your focus.
Know what you are doing and trust the process.
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