Difference between trading and investing
Throughout this guide you will encounter the words “trading” and “investing” multiple times. This might be a bit confusing but trading and investing are very different strategies.
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Key concepts in this chapter:
- Investors are more focussed on growing assets for the long term, typically done over many years and decades using fundamental analysis.
- Trading is mostly done by looking at charts, using various technical indicators and calculating probabilities, typically done on small time frames using technical analysis.
Investors are more focussed on growing assets for the long term. Investing is typically done over many years and decades. Investing is all about finding the value in the underlying asset. For example, figuring out if a company is healthy enough to be an investment for the future. As Warren Buffet (many people consider Buffet as the most successful investor in the world) explained many years ago:
“You don't buy a farm based on whether or not it is going to be worth more tomorrow or a week from now. You buy it as a business -- for the cash flows it will generate.”
A farm will generate cash flow by selling products like eggs and milk. It does not matter what the price will be in a few months. You won't buy a farm today and sell it next week. Investing is done in the long term.
What do investors look at to determine if an investment might be valuable?
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According to Buffet, value investing is the way to go. Buffet learned about investing from his mentor Benjamin Graham. Benjamin Graham has written a book about value investing called “The Intelligent Investor”. This book is known as the best handbook of all value investing books. The book itself can be hard to read and is not really exciting. There is no compelling story but rather based on raw data and fundamentals. But there is a lot you can learn if you are serious about value investing. While the book is quite old, more recent versions of the book are updated with recent data so you can still use the principles today. This does not mean that value investing is the only way.
What do day traders look at to determine their entries and exits?
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Trading is mostly done by looking at charts, using various technical indicators and calculating probabilities and risk. Not so much relying on the asset itself. Because it does not matter what the intrinsic value is if you are planning to sell a few minutes or hours later. Trading is mostly done on small time frames like 5, 15 minutes, one hour or daily.
Investors use fundamental analysis looking at income statements, debt and investments of a company while traders use technical analysis using charts and various indicators to determine trends in price. But you can also combine fundamental with technical analysis. At the end of this guide you'll find some links to in depth guides about trading and investing. For now it's sufficient to know the basic differences.
Must read:
If you are interested in value investing (investing in the long term), you must read the bible of all value investing books:
The Intelligent Investor
Learn everything about value investing from the mentor of Warren Buffet.
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