Investing Vs. Trading - Week In Review

Investing vs. Trading

Investing vs. Trading – Different Goals and Risk

 

I am a long-term investor and hence prefer buy-and-hold investing vs. trading. It works for me since I do not have the time to continuously monitor positions and the market to be a trader. But it is also my mindset that makes me focus on investing vs. trading. Investing is like running a marathon. There is a lot of preparation, and it is a long-term race. The goal is to build wealth over an extended period of time. Trading is more short-term oriented and focuses on the ups and down of the market. During the COVID-19 pandemic trading has become increasingly popular. The goal is to make a profit quickly but there is much more risk. Both approaches are widely followed, and in the debate between investing vs. trading your choice often depends on your tolerance for risk and personal preference.

What is Investing?

What is investing? The goal of investing is to build wealth. Investors will buy and hold stocks with the expectation that the value and stock price will rise over time. You may hold your stocks for years if not decades taking advantage of the power of compounding. Your total future return comes from three sources: the dividend yield, earnings growth, and change in price-to-earnings ratio. It’s a simple formula for total return espoused by John Bogle and it is reasonably accurate for a back of the envelope calculation. There are other considerations too. Investing requires a focus on risk-adjusted returns, diversification, staying fully investing, asset allocation, and keeping turnover low.

The idea here is that you are buying businesses that are undervalued and will generate long-term returns from top and bottom line growth. You can value stocks by P/E ratio, discounted cash flow (DCF), or even the Gordon Growth Model. I use all three. There are also different flavors of investing such dividend growth investing vs. high yield investing.

What is Trading?

What is trading? The goal of trading is to make a profit quickly. Traders will move in and out of stocks quickly often trading on daily, weekly, or monthly share price moves. Your total return is primarily from price volatility. Traders focus on factors like momentum, very low share price, social media buzz (meme stocks), news reports, industry growth, and technical factors over fundamentals. There are different types of traders including position traders, day traders, swing traders, and scalp traders.

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Disclaimer: Dividend Power is not a licensed or registered investment adviser or broker/dealer. We are not providing you with individual investment advice on this site. Please consult with ...

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