One of the biggest mistakes that investors make when investing is that they confuse investing and trading. They are two completely different things – and shouldn’t be mixed together. A confusion of the two can lead to significant losses for investors.

Read on for information on how you can avoid the mistake – and potentially save a fortune by doing so.

So – what is investing?

Investing is the art of buying a (or a part of a) company in order to benefit from its future prospects. In other words, as an investor you focus on the business and its future prospects.

It’s normal to consider a number of factors when evaluating a business and its future prospects. Such factors are called “the fundamentals” and normally include:

• The business model (how they make money)
• Competitive situation in the business’ target market
• The business’ competitive advantage (why customers chose their products)
• Growth prospects
• Profitability
• Management team’s qualifications and experience
• The industry
• Risk factors
• And of course… Valuation! (How much it is worth)

Most investors invest through the stock market. This is often the easiest way to invest, as you have access to several thousands of investment opportunity across the whole world from one brokerage account.

In practices this means buying stocks. Stock prices can be very volatile and irrational sometimes. However it remains crucial to remember that a stock is simply an ownership interest in a company.

The value of a stock is therefor ultimately determined by the value of the underlying business.

So if an investor focuses on valuing the underlying business he should be able to buy stocks when they are undervalued and sell them when they are overvalued. A lot of investors have done this – and made a fortune.  One of these investors is multi-billionaire Warren Buffet.

This kind of investing is called value investing.

And trading is, when you anticipate the movements in stocks. As you might have noticed, stocks don’t always move solely based on the fundamentals in the short run.

Stocks can be driven by all kind of factors in the short run. A short squeeze, A panic, rumors, new investors, optimistic expectations (based on hype), pessimistic expectations, an article.

All these factors can affect stock prices in the short run – and sometimes in the long run. But studies show that stocks ultimately (at some point) trade around their intrinsic value.

Successful traders study market participants (the ones who are investing in or trading a stock) and their decision making process. They find patterns that are predictable and trade based on it.

My favorite example stems from the development in cannabis stock prices.

It’s mainly retail investors who invest in cannabis stocks, as institutional investors don’t invest in the industry for two reasons - the career risk for portfolio managers and the relatively high valuation of cannabis stocks.

If an institutional investor wants to invest in the cannabis industry, they would likely invest in the private cannabis companies, as they are valued at significantly lower multiples than the publicly traded cannabis stocks.

We also know a great deal about this kind of retail investor’s decision-making process based on data from surveys. Based on this data we have concluded that cannabis stocks are driven by retail investors’ interest in cannabis stocks.  

We have used this information to create an indicator that have predicted the development in cannabis stock prices with over 80% accuracy on a week-by-week basis.

Some people use our indicator to trade of, while others use other methods. A great deal of people use technical analysis.

How You Can Avoid The Mistake

You can avoid the mistake of mixing trading and investing by clearly defining what you are doing – and sticking to one method. It usually gets dangerous when you are confused by all the information and mixes the different signals from the different methods.

If you are planning to value invest. Then stick to value investing – and don’t panic because some pundit says he believes the market is going to crash.

If you are trading based on a predictable pattern. The stick to the pattern – and don’t let other traders’ or investors’ opinions influence you. Stick to your process, as long as it’s sound.