There are many ways for people involved in the stock market to make money, but these strategies can be divided into two major ones: investment trading. It can be said that the difference between each strategy comes from two things. Time horizon (how long you are ready to take a position) ել Mindset (whether you are thinking as an owner or making a short profit).
Contrary to what you see in Hollywood movies and on television, research shows that the vast majority of market participants, practically everyone, would do better if they adopted the mindset of investors rather than traders. And this is due to the very low cost and inefficiency of the trade.
Here’s the difference between investing and trading, which is probably best for you.
Investing against trading. What is the difference?
“You earn money by trading by acting. By investing, you earn money while waiting. ” This is a phrase that sums up the main difference between investing and trading. Let’s divide the other main differences to see how they compare against each other.
If you are investing, you have a longer-term mindset about your investments; you will do things like the following:
- You think like an owner, that is, how the business will work, not just what the stock will do.
- Your long-term income is based on business, as opposed to better buying and selling skills than other merchants.
- You think of business as a business, its products, how it competes, the emerging industry.
- You do not want to be frustrated if you cannot get the right pitch so invest in a good capo.
- As you think further, you are shaken by short-term adverse market reactions, such as when a company announces quarterly earnings.
- You can be patient with your investments as they grow.
- You see a drop in stocks or stock as an opportunity for better businesses to come at a more discounted price.
- If you invest in funds, you will tend to take a more passive approach by regularly adding money to your portfolio rather than trying to time the market.
- You sell investments based on process և discipline when the investment is done, not because they did well this week or month.
Being an investor is about your mindset և process, long-term կենտրոն focused on business, not how much money you have or what the stock has done today. You make a good investment and then let the company’s success drive your revenue over time.
If you do business, you are much more focused on the short term և you are less interested in business as a business. You are likely to do some or all of the following, for example:
- You are less interested in whether the underlying business will thrive, but you are more interested in whether the stock can make you money.
- You want to know what other people think about trading, because you are not just playing with the pool or the pool, but with the other players at the table.
- You can watch short-term price movements, even minute-by-minute charts to predict the best time to buy or sell, և “you set the time for the market”.
- Stock prices drive your behavior, not your business.
- You tend to run out of stock, looking for stocks that are rising today, not at marginal prices.
- Your shelf life tends to be short (maybe just a day if you are trading, or maybe a few weeks or months) depending on your specific strategy.
- You can sell investments based on process և discipline, but these trading rules are much more relevant to what you do or lose than to your business.
- You may want to focus more on the market than as an investor, as you will need to make frequent buying and selling decisions.
Traders tend to be short-sighted. Being commercial is less about analyzing a business than about its stocks as a way to make money, ideally the faster the better. Success here relies on overestimating the next salesperson, not necessarily on finding a big business.
Investing works better than trading for many
If the difference between an investment և trade շատ is very similar to an active investment և passive investment և, then this is a must. These two investment approaches have many similarities.
Passive investments are a buy-and-hold strategy based on the core business of the underlying enterprises to generate higher returns. So when you buy a stock, you expect to keep it for a while, not just sell it when the price jumps or until the next person releases his stock.
Passive investments through funds (or ETFs or mutual funds) allow you to enjoy a return on target. For example, the Standard & Poor’s 500 has returned an average of 10 percent a year over time. That would be your return if you did not buy the S&P 500 Index Fund.
Active investments are strategies that try to win the market by trading in the market at a favorable time. Traders try to choose the best options և to avoid falling stocks.
While active investment seems to be a consistent winner, research shows that passive investment tends to gain most of its time. The 2018 survey of the S&P 500 Dow Jones Indices shows that 63% of fund managers investing in large companies did not exceed their benchmark for the previous 12 months. And in time, only a handful could do so, as 92 percent of professionals failed to conquer the market in 15 years.
These are professionals who have the experience, knowledge, and computing power to help them excel in a market dominated by turbocharged trading algorithms with well-tested methodologies. It leaves very little crumbs for individual traders without all these advantages.
Thus, investors are more likely to prefer a passive approach to markets, regardless of investments in individual companies or funds. Traders are more likely to prefer an active approach.
Trade 3 hidden costs to be tracked
Trading has a number of hidden costs, things that ultimately make it less profitable for most traders than staying true to the investment approach. Here are three of the most common.
1. Trading is a zero-sum game
Trading operates in what is called a zero-sum game. That is, if someone wins, it comes at the loss of someone else. For example, trading options is essentially a series of side bets between traders on stock performance. If the contract is worth $ 1000, the winning seller receives exactly that amount by actually taking it from the losing seller.
Thus, trading simply transfers money from player to player, and the sharpest players collect more money over time from less skilled players. In contrast, investors play a positive cash game where more than one person can win. Investors make money when a business succeeds over time.
2. It’s easy to miss the big days as a salesperson
Traders may think they are resourceful by avoiding ducks, but they often miss out on the biggest market days because they are out of the market or partially investing.
A recent report by Bank of America reveals how being out of the market can be so harmful. The data show that the total revenue of the S&P 500 from 1930 to 2020 was 17.715%. But what is the total revenue if you miss the top 10 market days of each decade? The result. Only 28 percent of the entire period with less than 100 days off.
Marketers have a saying. “Market time is more important than market time.” In other words, it is more possible to be an investment than to avoid losses and gain profits. And it is here that the long-term mindset of the investor helps to focus on the future. You’re pushing out the bad days because the market as a whole is on a long – term growth trajectory.
3. Merchants raise taxes
You create a tax liability every time you make a profit from the sale of assets. Thus, traders out of the market are constantly making a profit (or loss). This reduces their ability to complicate gains, as they have to cut the IRS for every profit they realize.
In contrast, investors tend to be willing to invest. And since the government does not require you to pay taxes until you sell the investment, investors can join at a higher interest rate, all the rest equal. In other words, they effectively force the government to provide an interest-free loan by deferring their taxes; they continue to consolidate the entire amount before tax.
For example, imagine that you started with $ 10,000, earned 20 percent at 5 percent per annum, but sold every year, and received 20 percent tax each year. At the end of the five-year period, you will have $ 21,000 in assets for a good annual profit of about 16%. Not bad.
But you will get even more if you do not sell. Without the sale, you would have made that $ 10,000 more than $ 24,883, saving you 20% of your annual profit. What if you decided to sell then? You will still have $ 21,906 after taxes or almost 17% per annum during that time.
This is a hidden advantage that investors have over traders.
The evidence is generally clear that investing is a strategy that works best for most people. Can some people beat the market backwards? Absolutely no questions asked. But for most people, it’s better to be an investor than a salesperson – it may take less time and effort.
Legendary investor Warren Buffett advises investors to regularly buy an index fund, such as the S&P 500, and then keep it for decades. This approach fosters the spirit of investing by adopting a long-term mindset, allowing the business to make a profit for you.