 What is the difference between trading and investing?
Most people would associate investing with buying and holding
shares. An investment is long-term consideration while a trade is
short-term proposition, I can almost hear the text books say.
However, sometimes traders hold positions for weeks and even
months. That is hardly a short-term trade?
I was taught that the difference between trading and investing
is a function of risk management. A portfolio manager does not use
stop-losses like a trader does. Instead the portfolio will be
constructed to diversify risk.
What does this mean for you?
As a trader you are interested in movement not value. It’s easy
to understand how a trader can sometimes get caught up in the
emotional frenzy of the markets and forget what his or her aim
is.
Remember that as a trader your job is to take profits from the
market, with low risk, using leverage. Are you interested in the
value of the particular stock or do you want the stock to move in
your direction? For me, as long as the stock has good liquidity and
reasonable size moves then I want to trade it. I really don’t
care if the stock is trading on the upside or the downside. I am
just looking for movement.
As a trader, if a position moves against me I get out.
An investor might be holding this position with a long term view in
mind. He does not mind if the stock drops in value. In fact he may
even think that at a lower price it might be worth buying more.
This is called averaging, and only works in full value
trading. When trading leveraged products I think this
is a highly risky strategy.
Decide from the offset if you are a trader or an investor. There
is nothing wrong with being either, or both, but you should be sure
that you understand the difference between the two.
Until next time, happy trading!
Tom Hougaard
Please remember spread betting is leveraged
and can result in losses quickly exceeding an initial outlay. It’s
not suitable for everyone and you should make sure you fully
understand the risks involved. If you have any doubt, please seek
independent advice.
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