Investing Vs Trading What S The Difference

• There is a question which is sometimes asked by those new to the financial markets, and even occasionally debated by experienced participants.
• Investing Vs Trading What S The Difference
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• That question is how one differentiates between trading and investing.
• Because both trading and investing – when one considers them from the perspective of the financial markets – are performed in very similar fashions, they are often thought of as interchangeable actions.
• After all, are at the most simple of levels application of capital in the pursuit of profits.
• If the author buys XYZ stock the author expects to either see the price appreciate or earn dividends – perhaps both.
• What separates trading from investing, is that generally in trading one has an exit expectation.
• An investor will buy a company’s stock with no predefined notion of when he or she will sell, if ever.
• He buys companies which he sees as somehow undervalued and holds on to his positions for as long as he continues to like their prospects.
• He does not think in terms of a price at which he will exit the stock.
• Once the Pound was allowed to float freely, and quickly devalued in the market, Soros exited with a handsome profit.
• That meets the criteria of having a predefined exit, making it a trade, not an investment.
• There is another way one can define trading as set against investing, though.
• It has to do with the manner in which the applied capital is expected to produce a return.
• In trading the appreciation of capital is the objective.
• You buy XZY stock at 10 expecting it to go to 15 and thereby produce a capital gain.
• If dividends or interest are paid out along the way, that is fine, but likely only a minor contribution to the expected profits.
• Investing looks more toward income over time.
• With these definitions in mind, consider what many people refer to as their single biggest investment – their home.
• Based the second definition of investing, a home is generally not an investment because in most cases is does not produce any income.
• The fact that many people expect to move in only a few years and sell at that point makes it even more of a trade rather than an investment.
• It’s the intention and definition of objectives which separate trading and investing, though.