There are two views of putting money to work in the market. The first is quietly sitting down, studying balance sheets and deciding on an investment that you’ll probably stick with for a few years. The other is the fast pace, high stress picture you get from movies like Wall Street. With row upon row of traders, two or three computer screens each, yelling at every single up and down tick of a stock. Exactly how realistic that is, I don’t know, but it makes for good movie drama.
For as long as there’s been market exchanges, there have been people who have taken a trading or investing approach to making money through that exchange. What exactly are the differences between the two? Which is better? What to watch out for?
Investing in the Market
Most people tend to invest in the market. It’s not because investing is the end all be all. It’s more to do with time. Investing takes a long term (nine months plus) view of the market. There is less concern about day to day movements in the market.
Good investors use fundamental analysis. They study financial statements, earnings, revenue, cash flow, debt, etc. and make a judgement whether a stock has value. The investor is able to weather the daily movements because the fundamentals will ultimately deliver a higher price in the future.
The best investors sell when the fundamentals change. Whether they change tomorrow or two years from now, if the fundamentals show the stock no longer having value, the investor sells and looks for another investment opportunity.
Trading in the Market
People who trade the market are trying to make money off of short term movements in the market. This can be done on a minute by minute basis up to a few months. It can be a very profitable way to make money but takes a lot of discipline.
A good trader uses technical analysis. They tend to study stock movements through charts and price trends first before getting into the fundamental analysis. They take full advantage of short term opportunities to maximize their profits.
The discipline comes in when getting out of a position. Regardless of what happens to the stock, a trader has a lower and higher sell price set. If the stock drops in price they get out with only a small loss. The higher sell price is the goal, they sell, take their profits and look for a new opportunity.
Which Style is Best?
Arguments can certainly be made for both. It’s kind of like driving a car. Some people like the peddle to the metal, see how fast they can get somewhere approach, others prefer a put the top down, set the cruise control leisurely drive. The best drivers, the pros, do both. Of course not everyone is cut out to be a pro.
If your new to the market, start with investing, learn the fundamental analysis. When your comfortable with investing, you can start looking into the trading side of the market. From there work with what is most comfortable to you.
What’s My Style?
Glad you asked. I tend to focus on investing with a dash of trading on the side. I look through the fundametals for value in the market. When the fundamentals change I sell. If my investment has a big gain (50%, 100% or more), I’ll sell half of the position to lock some profit, or take the initial amount out entirely and play with the houses money.
My short term trades tend to be a week to a couple months long. I don’t look for quick day trades, my risk tolerance doesn’t allow it. I set a sell price for both a loss and a profit. When the stock hits one of the those two prices I get out and wait for another opportunity to show up.
The key to all this is finding a style that works for you. Stick with what fits your risk and comfort levels. As long as it’s legal and your making money, your doing it right.