Many people don’t know that investing is different from trading. Investing is long-term, which means you buy, hold and sell after several years or even decades. Trading is short-term, which means you buy and then sell only after a few days, weeks or months. In forex, some traders buy and sell only after a few seconds, minutes or a few hours.
Because of the difference in time frames in which money cycles, effective strategies involved in investing and trading are also different.
For example, cost averaging does not work well with trading, because it’s a strategy designed for investing; the same way that price momentum analysis is more of a trader’s tool rather than of an investor.
Unfortunately, many people don’t know who they are – an investor or a trader. And thus, they sometimes apply the wrong strategies in what they’re doing, which causes them to lose money and consequently, feel stressed about the market.
I’ve seen so many people lately who believe they are investing in the stock market, but are actually trading. This misalignment in mindset and action will be the main reason why most of them will lose all their money within the year.
The allure of trading is very high, primarily because many find investing too boring.
There is a sense of exhilaration in trading, and a more heightened feeling of self-satisfaction when you make money.
Additionally, some traders consider time as more valuable than money. And they argue that if an investment fails, you didn’t just lose your money, but also several years in waiting to see that result.
But if you lose a trade, only little time is wasted, and you can immediately refocus your efforts to gaining back the money you just lost. On the other hand, investors claim that risks are lower when you invest as compared to trading.
Since you know you’re in it for the long-term, you’ll most likely choose investments whose outlook is good for your time horizon. Moreover, investing requires much less effort.
It’s a “set and forget” process, and when you compare it against trading, which requires “continuous tracking”, then time is not actually wasted, because you can still focus on making more money while waiting to see the result of your investment.
Are you an investor or a trader?
How do you know if you’re more suited to be an investor or a trader? Take this simple test to find out:
1. If I were to give you money, which would you prefer?
a. Receive P500 every month for 3 years.
b. Receive P12,000 now.
2. If I were to ask for payment to read this blog, which term would you choose?
a. Pay P100 per article.
b. Pay P15,000 now for unlimited and lifetime access to all the articles.
Think hard about your answers and then read below.
If you answered “a” on both questions…
Then you are better suited to be a long-term investor. Cost averaging on the stock market is a good strategy for you to build wealth.
If you answered “b” on both questions…
Then you have the attitude of a short-term trader. You like making money fast, and you don’t mind taking big risks. Forex trading may just be your thing.
If you answered “a” on Question 1, and “b” on Question 2…
Then you’ll probably enjoy either being an investor or a trader, or both! A good strategy for you might be to trade stocks or currencies, then funnel your earnings there towards investments.
If you answered “b” on Question 1, and “a” on Question 2…
Then you’re like most people who prefer making a lot of money fast, but are afraid to take risks. You can be a medium-term investor and put your money in moderate-risk instruments such as balanced funds.
It is important to remember that the rate of yield is always directly proportional to the risks involved. This means if you want to make lots of money fast, then you have to be willing to lose lots of money fast as well.
Alternatively, if you can’t take losing money in an instant, then you have to be content at making modest income at a slow and steady pace.
Please note that your results to this test is not an accurate determination whether you are an investor or a trader. But it is a good way to have an initial evaluation of yourself, so you can take further steps towards the right direction in learning who you really are.
A Good Balance
Being an investor is not necessarily better than being a trader, or vice versa.
However, before working on achieving that “good balance” – it is important, first and foremost, to get a clear understanding of the type of person you really are.
If you believe you’re an investor, then train yourself to be patient and persistent, but don’t be afraid to do a trade once in awhile.
If you’re more of a trader, then nurture that passion and hone your skills, but don’t forget to regularly invest for the long-term.