Drawing a Clear Line

Many of us may be trading and investing in stocks at the same time hoping that stock trading can help to boost their investment capital while stock investment helps to build our retirement funds. There is nothing wrong with trading while investing except that some people are doing it wrongly.

Many of us may be trading and investing in stocks at the same time hoping that stock trading can help to boost their investment capital while stock investment helps to build our retirement funds. There is nothing wrong with trading while investing except that some people are doing it wrongly.

I have personally done trading while investing, making the most fundamental mistake, causing myself to lose some of my investments. However, I have also learnt, through the hard way, and will continue doing it to shorten my journey to financial freedom.

Trading vs Investing

Different people understands the meaning of trading and investing differently.

To me, trading looks at technical charts of the stocks to purchase, set up the trades when the price is about to break its previous high and exiting the positions when the chart says so. Apart from using charts, traders can also be trading on news. An example of news trading is to buy Apple Inc (NASDAQ: AAPL) shares in late-August/early-September before their any announcements of their new products. Since most of the times on Apple’s announcement of their new products are well-received by people around the world, their stock price is set to trade higher, selling when the new-product fever subside locking in profits. Trading are short to mid term investing that focuses mainly on entering and exiting positions.

Investing on the other hand focuses more on the fundamentals of the company.

Looking at the business and financials of the company, investors invest their money in the company rather than the stocks. They buy the stocks of the company to own the company, hoping to hold on to the stocks forever or at least till the reasons why they invested in the company no longer holds.

Every Investment Made is Different

Every transaction that was done to buy shares of a company is different. This is especially so if the transaction is to trade the shares or to invest the company.  A trader usually buy shares when the prices goes back to its recent high, hoping that the price will break the high price and goes even higher. An investor on the other hand usually buy shares of the company when the price of the shares is lower than the value of the company.

Some traders they buy shares for a particular reason. It may be that the price turned around and making new highs or that an expected news releasing that will drive the prices up. However, if the price instead of climbing, starts to fall and the traders held on to their positions not wanting to lose money by selling the shares at a lower price than they bought. Usually, these traders will start finding reasons to why holding on is right and the reasons are usually: “Oh, the fundamentals of the company looks okie, maybe I shall hold the shares long-term as an investment”.

Since there are differences between the reasons to trade the shares or to invest the company, one should never “convert” the trades into investments. When a trade is “converted” into an investment, the traders will usually find reasons to justify the conversion and these reasons are usually very unconvincing.

The Bottom Line

As mentioned, I had made the fundamental mistake of converting my trades to investments. In the end, I had to sell these trade-turned-investments at an even lower price than if I had cut my losses earlier. Trades are always trades, investments are always investments. Both are done because of different reasons and usually the reasons are different thus we should never convert trades to investments or investments to trades.

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