Misunderstandings of Trading and Investing

I have attended numerous seminars on trading and investment. Whenever I was in a trading workshop or seminar, traders will always say something negative about investment and likewise, for investors on trading. I noticed that there is a very big misunderstanding about the concepts of trading and investment. I found it particularly disturbing on how entrenched they are in their respective beliefs and their reluctance to understand and accept the fact that both groups are actually participating in the same act for the same purpose and intention. Well, maybe I thought I should try structure our thought process with the intention to help make both parties less bias towards their beliefs.

Misunderstanding # 1 - Trading is not investing

A lot of investors try to avoid being associated with traders and likewise traders with investors.  Is trading totally interpendant from investing? According to Investopedia, the definition of each term is as follows:

"Investing" is defined as the act of committing money or capital to endeavor (a business, project, real estate, etc,) with the expectation of obtaining an additional income or profit.

"Trading" is defined as a basic economic concept that involves multiple parties participating in the voluntary negotiation and then the exchange of one's goods and services for desired goods and services that someone else possesses...In financial markets, trading also can mean performing a transaction that involves the selling and purchasing of security.

From these definitions, in order for an investor to buy a stock in the company, a transaction must take place between the "investor" or a "trader" and a willing seller of the company's shares who can be the owner of the company or someone in the market that holds some of the company's share (open market).  In another word, "trading" is part of the process of "investing". In a nutshell, "investors" must trade in order to participate in the investment opportunity and technically, "traders" share the same objective as "investors" where both commit their money or capital to endeavor a business (buying a stake of the company) with the expectation of obtaining a profit in the future.

 So, if you are an "investor", don't say you never trade and if you are a "trader", don't say you don't invest...for these two terms are a subset of each other. 

Misunderstanding # 2 - Investing is Long Term & Trading is Short Term

Another very common view point used to differentiate investors and traders is the length of time one holds on to his security before selling back to the market.  Fiancial market participants with the intention to make a profit in a very short term are generally known as "traders". In contrast, those who participate with the intention to make a profit in a longer term are known as "investors". Unfortunately, there is no single market standard period of investment for each case. "Traders" can hold onto a position between seconds (down to milli-seconds for auto-trading) and up to a few years (for trend trading).  "Investors" can hold onto their investments from as low as a few days to decades. You will notice that there is a very huge overlap between them where traders spent as much time holding to their position compared to investors.

If we take reference to the definition of investing and trading, you can also see that the amount of time holding on to the investment is not a factor in differntiating them. Therefore, there is no rules that "traders" cannot hold a trade "long" term, nor is there any to restrict "investors" from holding their investment "short" term. Furthermore, "long" or "short" term is subjective relative to the investor or trader.

 Therefore, we cannot say one is an "investor" just because he or she is holding a trade longer then days or months, neither can one be called a "trader" when he or she decides to sell the trade a day after it is bought. 

Misunderstanding # 3 - Investing is better then Trading or Trading is better then Investing

There is a classic saying, "All roads lead to Rome". But we also need to understand, some roads will take longer to reach there.  Having said there, we also need to understand that not all road is suitable for everybody.  There are roads that are lest risky but requires patience and takes longer time reach the destination, and there are roads that are riskier but need a shorter time to travel. Most importantly, we must also know that not all people who travels will reach the destination.

Just like the journey to Rome, there are also many ways in the journey of financial trading or investing.  Which route to take depends on many factors, for example capital, amount of time available to spend on analysis, risk tolerance, expected return of investment and capital turn over rate. Different investment style is required for different people as their constraints, needs and the adaptability to the investment style are different..

Thus, I believed that there is no one perfect investment approach, but there is one or a combination of several investment styles to match the character and meet the contraints and requirements of an investor.