The Difference Between Trading and Investing

this video is sponsored by Squarespace go to Squarespace com Sasha the plain bagel to save 10% off your first purchase of a website or domain using code the plain bagel if I were to ask you about stock trading this would probably be the image that comes to mind the New York Stock Exchange trading floor a scene synonymous with stock investing itself this is where traders meet in person to buy and sell stocks finding deals for their clients and employers and yelling tickers and prices across the trading floor well this used to be how most trading was done these days you can do most of the work online in advancements in technology have even allowed everyday individuals to take up trading at home to try and make money but despite the fact that trading involves stocks and other investments it is often seen as a very different practice from investing what you or I probably do when we buy or sell stocks you see being a trader whether professionally or as a hobby is different from being an investor and while you've probably heard of people making quite a bit of money off trading it's an area that most people are best served avoiding why will answer that question and more on today's plain bagel if you look at the literal definitions of the terms investing in trading you probably won't grasp the difference between the two after all investing is the act of spending money with the hope of generating some larger benefit or return in the future while trading is the act of buying or selling investments it's not very clear how the two differ in fact there is no technical distinction dictating what counts as trading and what counts as investing but the terms are often used to refer to two very different approaches to making money from investments an investor is someone who places their money in something and looks to profit from that asset growing over time whereas a trader is someone who makes money in the short term by buying and selling stocks frequently in other words while one relies on gradual appreciation the other focuses on market volatility now being a trader can mean a number of different things many companies actually hire traders to help them carry out their investment decisions for example an investment firm may decide they want to own shares of plain bego Co so they'll hire a trader to help them get the best price for the shares in this video however we'll be focusing on traders who operate with the sole objective of making themselves money and there are two main areas where in this practice differs from investing the timing of trades and the analysis of stocks for timing as we mentioned investing is typically a long-term strategy whereas trading is more short-term when you invest in a stock you're betting that over time the company will grow either by expanding its asset base or its profits you can invest in a company for as little time as you want but generally speaking you'll be aiming to sell the stock to 510 even 30 years from now on a day to day basis the price of a stock may fluctuate and indeed some investors try to take advantage of that by buying when the stock's prices abnormally low but once the purchase is made the focus tends to shift to the long-term movement rather than the short-term volatility training on the other hand is the fast and furious approach it involves buying and selling the investments to take advantage of short-term price swings day trading for example involves individuals buying and selling stocks same day while swing trading expands the process - of few weeks months or sometimes years there are other cells of trading as well but they all tend to fall under fairly short timeframes sometimes even making buys and sells within a matter of seconds because of this trader submit many more trades than investors and often cycle through many more positions but selling something shortly after buying it doesn't alone make you a traitor so let's move on to the second point of distinction the analysis to understand how the analysis of a company and its stock price varies between traders and investors we first need to explain the difference between a stock's price and its intrinsic value theoretically the price of the stock only reflects the number of buyers and sellers trading that stock at that given point in time and past the stock price there's some intrinsic value a true worth of that stock that only an omniscient being would know over time the price of the stock should track closely to this intrinsic value as buys and sells factoring company information known by the investors but human factors like fear or greed might lead a stock's price to deviate from its actual worth from time to time within the world of investing people take two approaches to this information passive investors ignore short-term fluctuations in stock prices and look only to benefit from the rising intrinsic value knowing that even if they do buy an overpriced stock they should benefit in the long term as the aggregate market grows active investors instead try to estimate a stock's intrinsic value so that they can buy the stock for less than it's worth allowing them to benefit not only from the rise in intrinsic value but also from the return of the price to its intrinsic level well these two approaches vary from one another they both generally depend on the intrinsic value of a stock increasing traders on the other hand only care about the stocks price there is no attempt to estimate the intrinsic value of their stocks and indeed many traders buy and sell stocks without even knowing what the company does looking only to take advantage of the short-term swings or trends in its stock price for this reason it's common for traders to focus their analysis on technical indicators these are measures and gauges that only take into account historical pricing information to help the trader determine whether there's a developing trend or pattern that they can quickly exploit it's the graphs and charts you imagine when you think of a professional trader sitting in front of their four screens buying and selling stocks now some traders do incorporate qualitative information into their research as well but it is usually only to take advantage of a short-term shift that they're expecting in the stocks price for example if a trader finds out that a company is announcing news tomorrow they may decide to buy the stock with the belief that the company's announcement will be positive leading to a jump in the stocks price in either case traders generally only focus on snippets of a company's information rather than trying to develop a broader understanding of the firm's operations so those are the two primary ways trading differs from investing it requires a very different mindset it operates in a very fast-paced competitive environment some would even argue that it requires a fair amount of bluffing this was more so the case when traders used to talk in person about the stocks they wanted to buy and sell but even today traders often try to hide their true intentions when they submit in order after all if you can convince other traders that you don't want to buy something you may be able to get it for a lower price just like with anything else all of this can make trading a very alluring practice for young investors I mean competition fast trades quick payoffs it's got it all and with all the ads we see online of millionaires and their private jets explaining how they went from zero to hero with their $300 trading strategy it probably seems like a fairly easy field to enter but trading is a high risk practice most traders put a lot of money behind their individual trades sometimes even borrowing to leverage their returns which exposes them quite heavily to short-term volatility of individual positions it also requires a lot of effort in time many trades only end up yielding a fraction of a percentage point meaning traders are continually rolling their money into new positions and honestly when it comes to amateur traders the truth is there just isn't that much working in your favour with such a narrow time frame you're often forced to make decisions on fragmented information and when you consider that you're competing with industry professionals with Kobe amounts of money cutting-edge research and even industry best algorithms I can trade faster than you can say the word stock it's just not a fair fight now I'm not saying you can't make money trading there are people who make a full-time living from their home with trading activities in some companies even offer salaried positions for traders like we mentioned earlier so there are some merits to the field but trading is a lot like playing poker you can be very good at it and indeed some people do make a living from it but there's a lot of chance involved with other great players at your table the odds are often not in your favor so any advisor will probably tell you that investing is the better way to go for the average person like Harry no more comprehensive research and holding over the long term you're more likely to benefit from the broad growth of the economy and the stock market as a whole sure you won't get that same rush as a tripled levered buy on an out of the money put option but that's probably for the best after all if you're looking for the rush of high-stakes and not so great odds you may as well go to the casino at least there you'll get free drinks thanks for watching if you like this video make sure to hit the like button if you like what we're doing here make sure to subscribe hit the bell icon if you want notifications about future videos if you have any feedback or topics you want me to cover in a future video leave a comment down below for the plain bagel my name is Richard coffin thanks for joining me today so perhaps your trading venture isn't going to bring you the success and fortune you were hoping for but maybe you have your own business 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Channel: The Plain Bagel

Views: 1,689,532

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Length: 10min 29sec (629 seconds)

Published: Fri Jun 26 2020