Trading and Investing Definitions
Trading is a short-term transaction, typically a year or less. Investing is long-term transaction, usually more than a year.
If you have an MBA in finance with a thorough understanding of market terminology, this explanation is going to disappoint you. The goal of this content is to present the information in the MOST SIMPLIFIED way possible.
If you’re new, that explanation was good enough. Although we’re speaking primarily about the stock market here, this definition can fit all forms of investing.
What Are Trades
Here’s something to know, not all traders are investors, but all investors are traders.
A trade can be described as an exchange for a benefit.
You trade your dollars for coffee, your labor for cash. In those moments, your belief is that-that dollar is less valuable than the coffee you want, and your labor less valuable than the money you are going to receive. We would never trade what we have if it was more valuable than the thing we were receiving. So the goal of trading is to benefit from it.
Example Of A Trade
Let’s look at an example: If you were to loan $1,000 to a friend to start their business, you wouldn’t expect that $1000 back tomorrow. It wouldn’t make sense. You wouldn’t even expect it in a month, maybe even this year. Why, because your friend has to start generating enough profit before paying you back or the business may crumble.
If you expect to take that money back from them now, they can only pay you so much. But if you’re willing to wait, at some point you expect to get back more than your thousand dollar investment.
Investing and Trading Goals
After all, profit is the goal. With that in mind, the trader wants the same thing as the investor. They want profit, but they want the return in a much shorter time.
As it pertains to stocks, your trader is buying Apple stock at $140 and selling it when they’re happy with the profit. They might hold a position for upwards of a year. If apple keeps going up all year, they’ll hold it until they see the price breaking down. So the year marker is not set in stone, just typical. Throughout that year, the trader is watching stock price closely, looking for an exit.
Example of An Investment
An investor, however, is not watching the stock price move frequently because they have a longer time horizon.
Your investor sees an opportunity to buy Apple at $140 because their price target on Apple is far higher. Their analysis could see Apple’s market cap tripling in the next 5 years. Our investor will leave that money in there with the goal of getting a much larger return in a longer period of time.
Professional Traders vs Professional Investors
An example of a true investor is Warren buffet, mentee of legendary fundamental investor Benjamin Graham. As a practice, with every dollar Warren Buffet invests he’s not expecting to see that dollar back for a few years. He will not realize any profits prematurely if it deviates from him plan. Generally, Warren stays in his investments for 10 years or more.
Now that he’s 90, we don’t know if he’s still doing that. We don’t know what his plans are, but that investment model has made him very wealthy over his career.
Cathy Wood is an example of both a trader and an investor. Her ARK invest fund owns shares of innovative and disruptive companies that they don’t plan on exiting for years. At the same time, she also exits industries and markets as she sees the conditions for the investment changing. For example, recently she exited all of her investments in Chinese companies when the fundamentals changed according to her initial analysis.
In addition, she will take profits off the table is companies run up faster than projected or even pass her initial expectations. Those could be examples of her trading. Doing that allows her to potentially move profits into her long term investments in disruptive and innovative industries. The time horizon for realizing returns on those companies has been stated at around 5 years.
Both Cathy Wood and Warren Buffet are very successful. Cathy has a lot of success trading AND investing, while Buffet has masted investing.
Should You Be Trading or Investing
Well, you should do both. I mean, we should all learn to be both traders and investors. However, if you could only choose to do one, I’d say be an investor playing a long game. Say you’re strapped for time or attention, investing gives you the potential for profit and also teaches you so many skills that are necessary for success. Not just in finances, but in life. Remember, investing is very emotional.
If you can learn to control your emotions over a longer period of time, it makes you both a better investor and trader. Conversely, being a trader doesn’t give you the skills to be a great investor.
Consider this, the wealthiest individuals to ever exist in modern times are all investors, not traders. Whether it be Warren Buffet investing money or Jeff Bezos investing his time, the long game is always more rewarding than the short game. And as a father, I’m investing both financially and also as a father.
Investing’s True Value
Being a father, you have to think of the long game. Every moment and experience I have with my children is an investment; I’m not trading. The moments of happiness, sadness, disappointment and joy are being invested in them. I want my children to have healthy relationships.
Every instance that I spend with my children is an investment to nurture the way the interact with the world.
My investments as a father are matched only by my financial investment in their long-term portfolios. I will gladly trade my time for cash-to in-turn invest that cash into their financial futures.
The moral of the story is to develop the skills to trade in the short term, invest for the longterm But, if you have to choose between being an investor and being a trader, know that long game is always much more rewarding in the end.