Approaching the Market: Trading vs. Investing

There are two main approaches when it comes to the stock market, you can trade stocks, or you can invest in a company’s stock. A trader is someone who looks to extract capital from the stock market consistently. While an investor is someone who looks to place or park cash in the stock market with the expectation of future returns.

Characteristics of Trading

Traders have one main goal to put cash in their wallet consistently. How do you know if you are a trader:

  • you enter and exit the same trade within a few weeks
  • you target entries and exits based on prior price action
  • you laugh at the idea of waiting a year to get paid
  • you track your ROI by month, not by year
  • volatility gets you excited
  • bearish moves get you even more excited

Being a retail stock trader has a few advantages, such as it takes relatively little capital to get started. Here at TSU, we use to suggest students begin cash trading with $5,000 in their accounts. However, with the recent changes in commission prices, it is completely feasible to start an account with $2,500. Retail traders are also nimble as you are entering and exiting positions nearly in weeks, days, and in some cases, hours. Finally, you can make a profit if the market goes up and if you set up your trades correctly, you can even make a profit when the market drops.

However, with the opportunity comes challenges as well, and the two big mistakes we see retail traders make are:

  • poor risk management
  • inability to follow their trading plan

We have witnessed traders grow their accounts from $30,000 to $300,000 and then back to $0 in a year. You must manage your risk, and you should stick hard to an established trading plan.

Characteristics of Investing

Unlike traders who want to generate money from the market consistently, an investor is looking to devote or park some cash into a company for a future payout. A trader is looking for short term returns on their cash while an investor is looking for long-term gains. Typically, an investor will remain in a market position for at least a year to reduce their capital gains tax. They will use tools like options as a way to hedge or protect their investment during a declining market, allowing them to remain in a position longer. Finally, investing will only bring returns in a bull market when the company you have invested in increases its stock value.

In closing, both approaches can generate a return, so make sure you are picking the right approach for you before you jump into the marketplace.

Leave a Comment: