We hear the terms trading and investing used interchangeably, so what's the
difference? I'm Suzanne with Arvabelle and in this
video we're going to talk about why it's important to determine if you are a
trader or if you are an investor. If you're not subscribed already hit the
subscribe button hit the bell and we will get right into it
Whether you're trading or investing, the goal of putting money into the stock
market is to make money. The amount of time that you're looking to make your
profits in is what differentiates trading from investing. There's no
absolute timeline on what makes something an investment or a trade, but
generally speaking an investment is when you buy a stock and you hold it for a
year or more. That could be five years or ten years or you could hold it your
whole life like Warren Buffett. When you're investing you're putting money
into the stock market for the long term in companies that you also think will be
around long term. When you're holding stocks long term, short term price
movements aren't really going to matter as much. You're just looking to make a
nice gain 5 or 10 or 20 years down the road. When you're investing you'll
generally choose stocks based on the companies behind the stocks. So you can
look into their sales and earnings reports and look into what kind of
management that company has. The goal is to find companies and businesses that
you think will be around long term and I will talk more about what to look for in
companies in the next video, so make sure that you subscribe. Trading can have
various time frames. You could buy a stock and hold it for a month or a week
or even a day. Trading is based more on short-term price movements so when
you're trading you're usually looking for some event or some pattern to
continue and you're saying, when this event happens or when this pattern
continues I think that the stock will go here and I'm going to sell for profit. It's not
like investing where you would hold onto it for several years. We can break
trading down into a couple of different categories. So first there's swing
trading, and that is when you hold a stock for a few months or a week - or I
even consider holding a stock overnight or over a weekend to be a swing trade.
Some people use the term a little bit differently but basically it's a
short-term trade. Day trading is when you are buying and selling stocks within the
same day. Because you are having to sit and watch the charts it does take a
little bit more of your time and if you're successful at it, it's more like a
high-paying desk job, whereas investing is a bit more passive. With investing you
don't have to sit there glued to your screen for 10 years. You can sort of just
check up on the stocks that you're invested in every once in a while maybe
when they release earnings or release news about their management. You
absolutely can make money day trading, but it is much higher risk. 90% of people
that trade lose money. And that doesn't mean that you can't make money you just
have to go into it understanding that the odds are not in your favor. I hate to
break it to you, but you probably are not going to become at the next overnight
penny stock millionaire. And if that is what you are looking to do, that is not
trading, that is gambling. Like anything, to be successful at day trading, it's
going to take practice, patience, and consistency. It is not a get-rich-quick
method, and if you treat it like gambling you will lose money like you are
gambling. If you do want to try out day trading, there are ways that you can test
it out without using real money. So TD Ameritrade has their Think or Swim
platform, and you can either open up a real account, or you can open up a paper
trading account. The paper trading account is a simulation account where
you can trade on the real market, in real time, but you aren't using real money.
It's a simulation. Some people are totally against paper trading, which I do
understand because there are emotional obstacles to using real money, but I
think that paper trading is good regardless because you can learn the
fundamentals and you can make mistakes on it without losing any money. And yes
you will have to learn how to control your emotions with your own money, but
you'll already have those fundamentals in place and you won't have to relearn
them. If you're like nah I don't really want to do that I just want to use real
money, what you could do is open up two different accounts and keep your
long-term investments separate from your higher risk trading account. If you're
consistently making money in your trading account, great. But if you are
consistently losing money, you may want to evaluate whether or not it's
really worth it to funnel any more money into that. Because if it's consistently
losing you money, that might not be the best option. So why does it make a
difference whether you are investing or trading? With trading you're trying to profit
in a shorter amount of time, so you use more technical analysis or looking at
the patterns and short-term price movements. Let's say that you bought
Amazon stock and you're not planning on selling it for another 10 or 20 years.
You don't really care how many times the price goes up and down this week, as long
as in 10 or 20 years the price has gone up. But if you bought Amazon stock and
you want to sell it the next day, or the next week, suddenly those smaller price
movements are going to become a lot more important. There's this lovely book that
breaks down trading and investing a little bit further. And don't hate on for
dummies books and they're good. But it has a section on technical analysis and
there's also a separate book on technical analysis so I will link both
of those down below. Now I will try to visually show you the difference between
day trading and investing. Where you buy and sell when you're trading within a
day is going to look more like this. Whereas with investing it's going to
look more like this. One of the big differences between trading and
investing is that traders set a stop loss. That means that with each trade
that they take, they usually have a target price point where they want to
sell for profit, but they also have a price point set where if the stock drops
below that, they'll go ahead and sell so that they don't lose any more money.
Hence the name, a stop loss. With long term investors there's usually not a
stop loss. Even when the price drops, they buy more. They view it as a sale. And
you're like whaaaat that makes no sense, so allow me to explain. I did not come up
with this analogy but it is great so I'm going to use it. We are going to compare
long-term investing in stocks like going to the store to buy toilet paper. So you
go to the store today, and you buy some toilet paper. Then you go back next week,
and you see that toilet paper is on sale. What do you do? Well you probably buy
more toilet paper. You' re
like wow I was gonna get this anyways and it's on sale! What a great deal I'm
gonna load up! What are you not going to do when toilet paper is on sale? You are
not going to rush back home, gather all the toilet paper in your house, rush back
to the store, and try to return it for your money back. That seems pretty stupid
when you put it into that context, but that is exactly where people run into
trouble when they don't determine whether they are in something for a
long-term investment or a short-term trade. A lot of times people will panic
sell, so the price will start dropping and they'll end up selling at the lowest
point just because they were afraid that it would go even lower. When in the grand
scheme of things, if you're holding on to it for 10 or 20 years that was probably
just a little blip in the price and the price will probably recover and carry on
the way it was going. But why I really wanted to talk about the difference
between trading and investing is that depending on what your goal is, if it's
short-term or long-term, that is going to change which strategies you use and it
may also make a difference in how you choose your stocks, which is what I'm
going to talk about in next week's video. So if you're not subscribed already, hit
subscribe, hit the like button if this video was helpful, visit our blog Arvabelle.com
and I will see you in the next video