 Personal Finance PowerPoint Presentation, Investing Versus Trading. Prepare to get financially fit by practicing personal finance. Most of this is from Investopedia, Investing Versus Trading. What's the difference which you can find online? Take a look at the references resources. Continue your research from there. This is by Gene Folger, updated November 29, 2021. Man, I feel like some coffee. In prior presentations, we've been looking at investment goals, investment strategies, investment tools, keeping the two main categories of investment in mind, that being fixed income or bonds, typically. And then we've got the equity side of things, typically looking at the stocks. Now we're thinking about the question keeping that in mind of investing versus trading. What's the difference? Investing and trading are two very different methods of attempting to profit in the financial markets. Both investors and traders seek profits through market participation. In general, investors seek larger returns over an extended period through buying and holding. So when we're thinking about investing, we're basically distinguishing here generally between the concept of buying and holding for a long period of time, thinking we typically have a longer time horizon, possibly saving for something like a investment for retirement or investment for some goal such as college tuition, for example. Traders, by contrast, take advantage of the rising and falling markets to enter and exit positions over a shorter time frame, taking smaller, more frequent profits. So notice we're distinguishing here on the time horizons that people will be taking. Now normally if you're an individual investor saving for some goal in the future such as retirement, you're typically wanting to take the perspective of an investor with a longer time horizon. Notice of course that the stock market, you can look at it if you think of the chart and you zoom out on the chart of what happens in the stock market. We're hoping that it's going to have an upward trend over a long period of time like 10 to 20 to 30 years that we're saving basically for retirement. If we zoom into that chart and look at it in a shorter period of time, we'll see that there's a lot of ups and downs, peaks and troughs, hopefully that result in a long run trend of increase over the longer term. So if you're longer term perspective, you're trying to write out the increases and decreases on the short term hoping and past history would indicate that the longer term trend will trend upwards over a long period of time. If you're on a shorter term perspective, a trading perspective, you're trying to gain, you're trying to guess, you're trying to out guess those basically shorter term trends and so that you could buy low sell high on the shorter term and profit thusly which means you're going to need more information and do a lot more due diligence to try to be able to kind of predict things in that environment than a long-term investor. Investing, the goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, basket of stocks, mutual funds, bonds and other investment strategies. So most of the time as individual investors, this is the type of strategy that we're typically going to be hearing meaning the strategy of diversify your portfolio and then basically look at the long term. Don't get stuck into short term trading or the short term profits because the strategy is designed to write out the peaks and troughs in the market, have a diversified portfolio that can balance them out and hopefully gain income over the long run which would be different than trading like say individual stocks say on a short term time period to maximum gains or losses of those short term peaks and troughs. So investments often are held for a period of years or even decades taking advantage of perks like interest dividends and stock splits along the way while markets inevitably fluctuate investors will write out the downtrends with expectation that prices will rebound and any losses eventually will be recovered. So if you've got that long term perspective sometimes it can actually be kind of detrimental to be looking at your portfolio on a day by day basis because you're going to be agonizing over the peaks and troughs that happen on a day by day basis when the whole strategy that you put the money in there was that you're going to put it in there in a long term perspective with the idea that you have the diversified portfolio that should write out in the long term the peaks and troughs on the short term but that can be an agonizing experience when you go into like say a downturn or dip in the economy or even if you're on the top side when the economy is doing well and you're saying why do I have so much stuff and like fixed income for example bonds I could have those in equities not be doing way better but of course those are there to hedge out the fact that equities could go down sometimes that's why there's the diversified portfolio. So if you put the plan in place then you have to have the wherewithal to be able to withstand the fluctuations on the market and kind of let it ride and relax and hopefully time will be on your side. Investors typically are more concerned with market fundamentals such as price to earnings ratio and management forecasts. Anyone who has a 401k or IRA is investing even if they are not tracking the performance of their holding on a daily basis that's the point and the IRA or the 401k plan is just like any other kind of investment tool in that what's under the umbrella of an IRA or 401k plan are the typical kind of investments in stocks and bonds usually grouped together using tools such as mutual funds and ETFs. You can invest of course in those same tools outside of the umbrella of an IRA or 401k plan but if they're under the umbrella of an IRA or 401k plan you get tax benefits that's why we put them in there in that way otherwise we wouldn't because we're being restricted to our money. The IRS is saying we're going to give you a benefit tax benefit to do this and we're going to say okay it's a good benefit we're going to do it even though it actually restricts our access to the money. So since the goal is to grow a retirement account over the course of decades the day to day fluctuations of different mutual funds are less important than consistent growth over an extended period. Trading on the other hand trading involves more frequent transactions such as the buying and selling of stocks, commodities, currencies, currency pairs and other instruments. So now we're looking more short-term type of things. Notice that you're a long-term investor you might be invested more in things like something in your IRA, your 401k plan, you're probably using tools such as mutual funds or ETFs or robo trading to help you to balance your portfolio on the long term if you're looking more on the trading which some individuals may do you might be thinking I do a little of both you might put some of your money into the long-term investing and then if you want to trade just because you like to trade possibly thinking of it to some degree is more of a gambling kind of thing money that you think you're okay with losing possibly on the trading that's one perspective you can look at it from obviously professionals that are making a career out of trading are going to spend a lot of time trying to get more information on the market they would need more information to out guess the market would be the general idea so that would take a lot of time and effort to be successful at in the long run a lot of traders can be successful when times are good and everything's going up it's going to be a lot more difficult to write out the long run and call the trades correctly over the long haul they're more likely to be trading individual stocks and individual currency pairs and so on and so forth as opposed to possibly mutual funds and ETFs okay so the goal is to generate returns that outperform buy and hold investing so your goal there is to say and you'll often see in periods of good times when stocks are going up you'll see a lot more people that are traders but basically they're saying my career is to trade stocks because obviously everybody's doing really good at trading stocks at those times because everything seems to be going up it's really when the time when you go through a down cycle that you've really learned who actually knows what they're doing because those are the people that are actually able to handle being traders on the downturn because a lot of people when they're being quite successful on the upturn are taking very risky trades possibly financing the trades, leveraging things and so on which could be a useful strategy but you don't really know until you can see whether they withstand a downturn so it's hard to tell unless you actually looked at someone's whole career to see how good they actually were at trading which kind of defeats the point to some degree to try to rely on one individual but in any case while investors may be content with annual returns of 10% to 15% traders might seek a 10% return each month so trading profits are generated by buying at a lower price and selling at a high price within a relatively short period of time so buy low sell high that's my strategy but obviously you're not looking at it from the long term you're zooming into the graph so if you think about the graph on the long term you would expect an increase in the graph over the long term of profits but if you look at the short term you're going to get a lot more zigs and zags and if you zoom into that then you can try to profit by low sell high and the zigs and zags but again to do that you need a lot you need more information than others have because you're doing better than other people in trading and that's what the trading means basically so trading profits are generally by buying at a lower price okay the reverse also is true trading profits can be made by selling a higher price and buying to cover a lower price known as selling short to profit in falling markets so while buy and hold investors wait out less profitable position traders seek to make profits within a specified period of time and often use a protective stop loss order to automatically close out losing positions at a predetermined price level traders often employ technical analysis tools such as moving averages and stochastic escalators to find high profitability trading setups a trader style refers to the time frame or holding period in which stocks commodities and other trading instruments are bought and sold traders generally fall into one of four categories we've got the position traders positions are held from months to years we've got the swing traders positions are held from days to weeks you've got the day traders positions are held throughout the day only with no overnight positions and then we've got the scalp traders positions are held for seconds to minutes with no overnight positions so note that when we're trying to zoom in if we're looking at a long term investment type of strategy then you've got that chart that's going to go up hopefully over the long term when you zoom into the chart then you're going to have these peaks and troughs in the charts and then the question is okay well how how much do I want to zoom into this where's my focus in term of the time frame in terms of when I'm going to be trading am I trying to make trades to guess those peaks and troughs on a position held for months or am I trying to see those peaks and troughs zoom in even tighter to see the peaks and troughs basically on the days and weeks or even and that would be like more the day trading or overnight type of things or am I trying to really zoom in and try and look at the zigs and zags the ups and downs on an hour by hour minute by minute basis seeing the activity that's happening kind of real time and you can imagine each of those niches has its own kind of specialties because you might be able to pick up on particular things and each one of those particular niches so if you were to move from long term investing trader to investor in essence to a trader of some sorts then you want to think about what's going to be my competitive advantage here where's going to be my focus how tight am I going to be looking at the swings of things and so that I can maximize my potential so traders often choose their trading style based on factors including account size, amount of time that can be dedicated to trading level of trading experience, personality and risk tolerance