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Many people believe investing in the stock market and trading in the stock market are one in the same...and these same people are usually the ones who wonder why they rarely make much (if any) money in the market. These types of people usually invest on hot tips, gut feeling, and try to chase the market after it has already gone up.
The primary difference between trading and investing is your INTENTION. However subtle, this is a massive difference that will create more red ink in your portfolio than almost anything if you don’t understand this difference.
The first step in deciding which method of buying stocks is right for you is to understand the difference between investing and trading.
Investing is when you buy the stock based on solid fundamentals, and hold it for the LONG run. When I say long, it generally means one year or more. You don’t pay much attention to the daily fluctuations of the market, or whether your stock goes up or down a few percent. You have found a company that you believe will become the next Walmart, or Microsoft, and you plan on owning a piece of this company for a long time.
Now, even more importantly, you must ask yourself what it takes to find a stock with good fundamentals! Just because a company has grown 30% each quarter for the last 3 years does NOT necessarily mean it has great underlying fundamentals. You really must be able to read the companies financial statement, analyze the management, compare the industry they are in, and take an active roll in looking into the daily operations.
In other words, review this investment as if it is your own personal company!! If the financials are shaky, or the company growth is slowing or expected to slow, this may not be the best business to INVEST in…
Trading however, is another matter entirely. When someone trades a stock, it is for a SHORT period of time, generally between one day and 6 months. The trader is NOT looking for the next Microsoft, they are just looking for a stock that will move up (or down) a few percent quickly. Traders can and do make money on in an up or down market, and often use TECHNICAL analysis as well as fundamental analysis to profit.
So what does it take to be a good trader? Well, a basic understanding of chart reading and technical analysis should be a prerequisite. A trader will analyze charts, and if everything looks good, then they will look for an upcoming event, such as an earning report or merger announcement, and then pounce on the stock. Once the stock makes its expected move, the trader sells the stock and is out of the market. It is important to note that successful traders generally study the market every day, as they are always looking for “the perfect storm" of a trade.
So, depending on your style and comfort level, you can properly choose the type of investment strategy that works best for you. This will keep you focused on YOUR strategy, and not be distracted by the latest hot tip or other peripheral distraction.
For those of you who would rather follow a system, I am currently testing several, and you can find one that is right for you at my website, breakingwallstreet.com
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Article added to SearchWarp.com on Wednesday, February 22, 2006 View other articles written by Greg Podsakoff(24)
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