Thursday, August 24th, 2006
The one difference between trading and investing
At Global Growth Investor we use the terms ‘trading’ and ‘investing’ interchangably. This is partly because we cover a wide variety of growth techniques, so our readers are both traders and investors. But mainly because we view trading and investing as virtually the same activity.
The diagram shows the essence of both trading and investing.
When we identify that we have an ‘edge’ that puts the odds in our favour, we buy at X. That edge could be a CANSLIM system for traders or some fundamental criteria that show a growth stock is way undervalued for investors.
Traders actively identify their risk by placing a stop loss at Y. By not defining their risk with a stop loss, the risk investors face is that the company will become worthless. So investors effectively have a stop loss at $0 (Y in the chart above = $0). So like trading, the downside is limited (assuming no margin is used) and the upside is big.
The only difference is that investors are willing to hold for longer (perhaps forever in the case of buy and hold investors) to get a large multiple of what they risked on the stock.
So investors and traders both define their edge, seek big upside and have limited downside. The only difference is their time frame.
Word Count: 208. This entry was posted on Thursday, August 24th, 2006 at 8:32 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
August 24th, 2006 at 9:54 pm
You couldn’t be more correct. An investor is investing in something…Long term. A trader is only interested in the short term profit to be made through the process of trading securities. Warren Buffet is an investor. Day traders are traders.
September 4th, 2006 at 2:03 pm
I think the differences are a little more fundamental than you let on. Traders buy stocks. Investors buy companies. We’re all somewhere on a continuum between them, but while a trader will buy an overvalued stock based on price movement and technical analysis, an investor seeks to buy a company that the market has temporarily undervalued.