Having highlighted the misunderstandings of investing and trading in the previous post, the market seems to have vaguely redefine "investing" and "trading" with some additional characteristics so as to differentiate the two.
In fact, from the very same source where I extracted the definition of the two terms, Investopedia, it describes the differences between investing and trading as follows:
"Investing"..."The goal of investing is gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks and other investment instruments.....Investments are often held for a period of years, or even decades..."
"Trading"..."involves more frequent buying and selling of stocks,...to generate returns that outperform buy-and-hold investing...."
Since there is no market standard of how long an investor or a trader have to hold on to their position, we cannot clearly differentiate investing and trading using holding period of the portfolio. The key difference I see in these two different styles are:
"Investing" expects a profit that generates from the potential of growth (sometimes includes dividend growth) of a stock or market. In order to estimate the potential, "investors" analyze current and past fundamentals performance of the security to determine potential future growth. Since growth cannot be obtained overnight, "investors" need to hold on to the security for at least until the next financial report or upon a confirmation of a news that will change the growth potential drastically, to determine if the estimation is accurate before deciding to exit the position. Although all investments carries certain level of risk, using fundamentals to analyze the market reduces the risk in the long run, as past fundamental performance is a more tangible information to determine potential growth which results in profit for "investors" as compared to using behavioral study approach of technical analysis. Some of the most well known investors are Warren Buffet, Peter Lynch, Philip Arther Fisher, just to name a few.
"Trading" expects a profit that generates from the volatility of the stock or market. In another words, their intention is to profit from the natural cyclical behavior of the market caused alternative force of supply verse demand and greed verse fear. To put it simply, "traders" generates their profit through buying at a lower price and selling at a higher price or vise-verse for selling short. There is minimum or no reliance on past fundamental performance of the security, for the key is the ability to time the market by studying the behavior of the market relying heavily on price movement and volume of transaction (both buy and sell, even at tick level). "Traders" believed that the behavior of the market can be reflected on technical charts derived from the price and volume data obtained on a specific period of trading and with the help of indicators calculated, also from the price and volume that supposedly shows the momentum and oscillatory characteristics of the trade in that period. Since, "trading" derives its profit from the cyclical behavior of the market, "traders" do not have to wait for a long time to materialize their profits, thus the period of "trading" is generally shorter so that "traders" can maximize their gains from the multiple ups and downs of the market cycle. Unlike "investors" who ride through both the ups and the downs cycle, "traders" can also take advantage of the down cycle to take profit by "selling short". Some very well-known traders are Jesse Livermore (1877-1940), William D. Gann (1878-1955), Richard Wyckoff (1873-1934) and those who are still alive, George Soros, Jim Rogers and many others.
So, the key difference in style between "investing" and "trading" is the philosophy of how each of them makes investment decisions. An "investor" makes the decision to invest base on the potential return of investment of a firm by analyzing the current fundamental performance which shows the current health of firm and past fundamental results which supports the assumption of future growth. A "trader" makes the decision to invest by analyzing the behavior of the market from pass price and volume movement and repeated patterns to time the entry and exit into and from the market.
Each of these investment styles has its strengths and weaknesses. We may discuss about them in the next post.
