Investing vs Trading Explained: Strategies, Risks & Real Examples

1. Introduction to Trading and Investing

Hey there! you can buy stocks for trading or investing. But, what’s the difference? Both trading and investing involve the same action of making money from investment. The differences lie in the time period and the way to analyze the stocks. So, how do these two things differ from each other? Well, let’s understand more about both of them.

2. Understanding Trading and Technical Analysis

The first way. Trading. As the word trading means buying or selling goods, then trading in stocks is the same. In the stock market, trading means buying stocks at a lower price and selling them at a higher price in a short period frequently. To trade effectively, you need to understand something called technical analysis. But what is technical analysis? I believe you have seen stock graphs many times, right? This is called a candlestick chart, and each candlestick represents the price movement of a stock. Basically, when the candle is green, it means the stock price is going up because more people are buying the stock than selling it. When the candle is red, the stock price is going down because more people are selling the stock than buying it. Candlestick charts are actually more complex than that, but in this b, I will keep it simple. Traders analyze these graphs to predict when and where the stock will fall and when and where it will rise again. Technical analysis involves studying past price movements and patterns to forecast future price behavior, based on the belief that historical patterns tend to repeat themselves.

3. Trading Examples, Risk, and Strategies

Let’s get into an example. Let’s say you want to buy a stock, and you see this graph. The golden rule of trading is to buy at a low price and sell at a higher price to make money. Using your technical analysis, you predict that at a certain point, the stock will stop falling and start rising again. Most traders wait until the graph shows signs of growth before buying. For instance, you buy 1 share at $10. Then you wait for the stock to grow, and let’s say it reaches $13. You analyze the graph again and see signs that the stock will fall, so you sell your share for $13. Congratulations, you just made a $3 profit. As your prediction was correct, the stock falls to $11. You see signs again that the stock will rise, so you buy it at $11. The stock grows to $16, and you sell your share again, making a $5 profit. So, you might think trading seems like easy money, right? Well, the example I just told you is like every trader’s dream because, in reality, it’s not that good. In reality, technical analysis is not 100% accurate. You’re predicting when the stock falls and when it grows again. If your prediction is wrong, you lose money. In most cases, you might buy at $10, expecting it to rise, but instead, it keeps falling. To minimize losses, traders use a strategy called “stop loss.” Stop loss is when a trader sells the stock when the stock price has hit a certain price or percentage before it falls further. For example, if you have $10 to trade, you can only tolerate losing $2, you set a stop loss at $8. So, when your stock value drops to $8, you immediately sell the stock before it falls further. After doing a stop loss, the stock might fall a bit more and then rise again slightly. You may see this as a sign of recovery, so you buy again at $9, expecting it to rise. However, if the stock falls again rapidly and you have to stop loss again, you end up losing more. In this scenario, you lost $2 initially and another $3, totaling a $5 loss. And the another scenario is you buy the stock at $10, and the stock starts to rise. At $13, you see signs that the stock might fall, so you sell to lock in your profit. The stock falls a bit as predicted, but then it rapidly grows to $17. You’ve missed out on a much larger profit because you sold too early. So, while you made a $3 profit, you missed out on a potential $7 profit. So, trading involves a lot of risk and requires constant monitoring and quick decision-making.

4. Types of Trading and Markets

And there are also different types of trading, including Day Trading, which involves buying and selling stocks within the same day to profit from small price movements. Then, Swing Trading, which involves holding stocks for several days or weeks to profit from expected price changes. And Position Trading, which is a longer-term strategy where traders hold stocks for months, aiming to benefit from longer-term trends. You can trade in various markets like stocks, forex trading, which involves buying and selling currencies. Commodity trading includes gold, silver, oil, and agricultural products. And also, cryptocurrency trading, like Bitcoin, Ethereum, these meme coins, and others.

5. Understanding Investing and Fundamental Analysis

And let’s continue to the second way. Investing. While trading focuses on short-term gains, investing is about building wealth over a longer period. As the word investing means buying assets that will grow in value and will generate income for you over time.In stock market, investing means buying stocks and holding them for an extended period, often years or even decades. Investors look for companies with strong fundamentals, believing that their value will increase over time. Additionally, some companies pay dividends, which means they distribute a portion of their profits to their investors regularly. Unlike trading, investing doesn’t rely heavily on technical analysis but focuses more on fundamental analysis. And what is fundamental analysis? Fundamental analysis evaluates a company's financial health and performance. This includes analyzing financial statements, such as the balance sheet, income statement, and cash flow statement. Investors look at metrics like revenue, profit margins, earnings per share or EPS, return on equity or ROE, and other metrics. By doing this, investors will know whether the company is growing, profitable, and worth investing in. Because no one wants to invest in a failing company.

6. Investing Example and Long-Term Benefits

So, let’s get into an example of investing. Let's say you want to start buying stock to invest and you find a company named WeeWee Shoes Corporation. You’ve done your research and believe WeeWee Shoes Corporation has strong growth potential because they make high-quality, stylish shoes that have become increasingly popular. So, you decide to buy 10 shares of WeeWee Shoes Corporation at $50 per share, totaling $500. Over time, WeeWee Shoes Corporation launches new shoe designs that go viral and captures the interest of many people. The company expands by opening new stores and boosting online sales, leading to increased revenue and profits. The company also pays a dividend of $2 per share annually. With your 10 shares, you receive $20 each year in dividends. The company’s stock graph goes up and down, but overall the trend is still going up, and you still believe in the company as it continues to do well, as WeeWee Shoes Corporation never stops innovating new styles of shoes and everybody still loves it! After holding the shares for five years, the stock price rises to $150 per share, and you decide to sell them. Now, your initial investment of $500 has grown to $1,500, giving you a profit of $1,000. Additionally, over the five years, you’ve earned $20 in dividends per year, which means you got $100 in dividends, bringing your total earnings to $1,100. Now, you might think investing sounds simple and like easy money. If it were that easy, why doesn't everyone do it? The truth is, investing takes time and patience. Even the most successful investor, like Warren Buffett, took decades to build his wealth. He started investing when he was 11 years old, became a millionaire at age 32, and a billionaire at age 56. Quite a long time, huh? That's why not everyone is willing to do long-term investing, as Buffett said, "Nobody wants to get rich slowly.” Also, investing isn’t limited to stocks. Other common markets for investing include bonds, which are loans to companies or governments, which will pay you interest over time. Then, mutual funds are like a big basket of different stocks and bonds managed by professional investors. When you invest in a mutual fund, you’re giving your money to these professionals, who will invest it for you. When they make a profit, they return some of that money to you, but they also take a fee for their services. Then, ETFs, or Exchange-Traded Funds, work similarly to mutual funds, but you can buy and sell them on the stock exchange just like individual stocks. Then, property investments that can generate rental income and appreciate over time. And cryptocurrencies which are digital assets like Bitcoin, Ethereum and these meme coins.

7. Trading vs. Investing: Final Comparison and Advice

So, in summary, both trading and investing involve buying stocks or other investment instruments, waiting for the price to grow, and then selling at a higher price. But the difference lies in the time period and the way to analyze. Trading is done in a much shorter time, maybe in hours, days, weeks, or months. Investing is done over a much longer time, like years or even decades. For example, Warren Buffett has held Coca-Cola stocks since 1988 until this blog is made which is 2024. Then, trading focuses on technical analysis, which involves predicting price movements based on historical price patterns and trends. While investing focuses on fundamental analysis, like looking at a company's financial health, market position, and overall potential for growth. In trading, you don’t need to care whether the company is profitable or whether the business is good or not, just focus on the price movement. While in investing, you don’t need to care whether the price is fluctuating up and down, just focus on the company’s performance that assures you it will grow well in the long term. Trading is more difficult, more stressful, and more risky. If your prediction is correct, you could get thousands of dollars overnight! But if your prediction is wrong, you could also lose everything overnight. While investing is more relaxed and less risky. You can buy your stock today and leave it for 1 or 2 or even 10 years without even checking on it, as long as you believe the company is still doing well. For example, if you bought 100 shares of Apple stock in 2008 for $300 when the price was about $3 per share and simply held it for 16 years, your investment would have grown to about $22,000 by 2024, when the price reached approximately about $220 per share. And some famous traders include Andrew Krieger, Paul Tudor Jones, Stanley Druckenmiller, and the controversial George Soros. In contrast, notable investors include the legendary Warren Buffett, Benjamin Graham, Peter Lynch, and Carl Icahn. And, you might be wondering, "Which is better or more profitable?" The answer is it depends on various factors, including your financial goals, risk tolerance, and time commitment. If you want to make quick money and are okay with taking risks, trading could be a good choice for you. Trading usually means you need to watch the price movements all day to make the right decisions, so it often feels like a full-time job. But remember, it’s important to really understand how the market works, and you have to be ready to accept losses when they happen. On the other hand, if you’re looking for a more stable and less stressful way to grow your money, investing might be better for you. Investing allows you to put your money in and let it grow over time without needing to watch the market constantly. This approach is great if you have a busy schedule and can’t keep checking prices. While it might take longer to see returns, the potential for steady growth can be rewarding in the long run. So, both investing and trading can be profitable but both using different ways and risk tolerance. And before starting trading or investing, please make sure to learn as much as you can! Because if you don't have enough skills or knowledge about investing or trading, you will be a gambler who doesn't know what they're doing and will end up losing money.

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