What are the main differences between trading and investing?
After taking a two week break I’d like to recommend that you start your trading journey with a deep education on the financial markets and then read charts and watch price actions, building strategies based on your observations. Test these strategies with paper trading, while analyzing results and making continuous adjustments.
Investing takes a long-term approach to the markets and often applies to such purposes as retirement accounts. Trading involves short-term strategies to maximize returns daily, monthly, or quarterly.
Investing typically involves long positions only, while trading may include long and short positions to benefit from both higher and lower market moves 1.
A business is a journey and our journey as an investor in it will be rewarding when the Business is growing its true value over time and your conviction as a shareholder increases along with that.
As Ben Graham wrote 70 yrs ago, the “Market is there to accommodate us, not to command us." Deal with it when you want to, not when you have to.
The greatest investors have all made a fortune off of their success
These investors differ widely in the strategies and philosophies they applied to their trading; some came up with new and innovative ways to analyze their investments, while others picked securities almost entirely by instinct.
Am I interested in researching and following this Company and Industry for the next few years? Is it in a strong and durable growth trend?
If you are a person who is close to retirement and needs to be conservative you will have a very different perspective compared to a new investor who has never experienced a Bear market or isn’t rooted in investing concepts. Know yourself first, read widely, learn from some, but always make your own decision and take actions that are aligned to your long-term goals and best interests.
Know the market that it operates in, how big its market is and how competitive it is and understand how it has grown in the past and how this may look in the future. This can be very difficult to judge if unable to access research, but knowing a few stocks very well, and having an understanding of the value of the share, is a better approach than following too many stocks and not really having a great understanding of any.
What is a Moat, and how does it help an investor?
Buffett was preaching about the flywheel effect before it became cool. Back then, newspapers were similar to today’s platform businesses like Amazon ($AMZN), Meta ($FB), and App Store ($APPL). The “network effect” moat source has become more relevant as our world has grown more digital. It describes the phenomenon where the value of a product or service increases as the number of its users grows.
Network Effect: As more people use a company’s product or service, the value of that product or service increases for both new and existing users.
The term economic moat describes a company’s ability to maintain its competitive advantages and defend its long-term profitability. A company’s competitive position either grows stronger or weaker each day. Most companies are working hard to widen the moat, a business without moat will have its returns competed away 2.
Regardless of improvement, your competitors will quickly copy your advantage away. If the returns on capital are dismal, reinvestment will only destroy value.
Want to trade but don’t know where to start?
Learning how to trade the financial markets begins with educating oneself on reading the financial markets via charts and price action. Practice makes perfect or, at the very least, it allows the beginner to test out theories before committing real funds.
Many brokers let clients engage in paper trading with their real money entry systems, Investopedia has a free stock market game 3.
- Open a Trading Account
- Learn to read financial articles, stock market books, website tutorials, etc.
- Study the basics of technical analysis and look at price charts—thousands of them—in all time frames.
- Paper trading, or virtual trading, offers a perfect solution, allowing the neophyte to follow real-time market actions, making buying and selling decisions that form the outline of a theoretical performance record.
- Now is the time to start a daily journal that documents all of your trades, including the reasons for taking risks, you need to address position and risk management.
As you get more experienced you may want to join FinTwit, which is a short word for Financial Twitter. It is a community of investors, traders on Twitter who share their trading ideas, what they have traded, what they follow and what their opinion is about financial markets. And the most important FinTwit is FREE to use. To join FinTwit is pretty easy or you can read here more about it 4. You can also kickstart the journey by listening to “Trading for a Living (audiobook)" - Dr. Alexander Elder 5.
It is time in the market, not timing the market, that is the key to wealth creation.