Thursday, July 31, 2014

Investing Vs. Trading

Long-term Investing vs. Short-term Trading:

There is a large difference between investing and trading. As Warren Buffett says, when you buy a share of stock think of it as if you are buying the whole company. Is this investment so great that you would like to own the whole company? Investing is a long-term approach that uses analyses of the company's financials, such as the balance sheet. Aside from looking at the financials, an investor should always research the risk and growth potentials of a company and the current management of the company.

Long-term investing is an approach that focuses on the fundamentals of a company and not the price movement of a stock. Long-term investing can be less risky, dependent on what you are invested in, while also having lower brokerage fees, since you are not buying and selling as much.

Trading on the other hand is short-term. Rather than purchasing a stock because of the company’s fundamentals, trading places a focus on the movement of a stock’s price within a short time period, from a day to a month. Market trends, trading volatility, stock volume, moving averages, and technical analyses are some fundamental tools used to determine short-term trading opportunities. Short-term traders commonly use alternative investment tools, such as stock shorts and derivatives.

Short-term traders can range from day traders who buy and then liquidate all positions at the close of the market to traders that purchase companies for a few weeks. Short-term trading can also be risky because you are buying into market trends, not investing in the fundamentals of the company. This means that if you have a short-term investment horizon and a stock experiences volatility, (Large movements in the price of the stock) your investment horizon does not allow the stock the opportunity to regain losses. Stocks tend to move in a cyclical nature, moving up and down, like a roller coaster. Short-term investing can also be costlier due to a larger amount of brokerage fees.