This article was written in partnership with ShareInvestor, a financial internet media & technology company that owns one of the largest investor relations network in Asia.
Trading vs Investing
People often confuse trading and investing; many use them interchangeably. However, these 2 ways of making money in the market are actually very different. Whether you’re more of a trader or investor largely depends on your risk tolerance, personality and holding period (time horizon). Let’s zoom into each of the two!
*HINT: Read to the end & find out how to win INVEST Conference 2018 tickets (U.P $88)*
Trading is the frequent buying and selling of financial securities (stocks, bonds, fx, commodities). Their analyses are usually based off price action and technical indicators such as support and resistance, trendline, Fibonacci retracements/extensions and moving averages, to name a few. Traders that use technical analysis believe that buying and selling patterns of other traders are printed on the charts.
Traders do not expect to make money on every trade. They believe in developing a trading strategy that produces a positive expectancy in the long-run. It may come as a surprise that even a system with a 40% win rate can actually be profitable. Below is an illustration of a sample size of 10 trades.
Traders aim to achieve asymmetrical risk-to-reward ratios, expecting at least $2 of profit for $1 of risk. Their expected profitability is determined by the win rate and risk-to-reward ratio. As seen above, a 40% win rate could still earn a trader 2% consistently. More attention should be given towards risk management and proper position sizing when starting out in trading.
Different types of traders in the market can be defined by the holding period of their positions. The table below compares the different types of traders.
|Scalper / Day Trader||Swing Trader||Position Trader|
|Holding Period||1 Hour – 24 Hours||1 – 7 Days||3 months & beyond|
(every min counts)
|Medium (1-2 times/day)||Low (1-2 times/week)|
|Percentage-in-points (PIPs)||10-20 PIPs||50-120 PIPs||>250 PIPs|
We personally prefer swing trading because it suits our busy schedule and we can catch sizeable moves in a trending market. If you think you’re a trader or an aspiring trader, check out the trader track at INVEST Conference 2018 where you can discover not only the winning edge of successful traders but also an alternative approach to trading! Find out how to ride market trends like a pro and leverage on new tools to strengthen your portfolio!
Investing, on the other hand, has a longer time frame from a year to almost forever. Investors do a thorough analysis of companies that they would like to invest in before committing any capital. Unlike traders, technical analysis is not as prolifically used as investors usually ignore short-term price movements and look for high-quality businesses that will give them superior returns.
There is no one way to invest, and investors usually create their own investment strategy. However, investors usually subscribe to one of the two main schools of thought when it comes to investing: Value Investing and Growth Investing. Benjamin Graham & Philip Fisher are the fathers of Value Investing & Growth Investing respectively. Warren Buffett describes himself as 80% Graham and 20% Fisher so you can see where he is on the scale. Below is a table to compare the different metrics value and growth investors look out for.
|Value Investing||Growth Investing|
|Strategy||Buy stocks below “intrinsic value”||Buy stocks with high earnings growth potential.|
|Key Financial Ratios||Price/Earnings, Price/Book, Debt/Equity, Free-Cash-Flow.||Price/earnings to growth (PEG), Earnings Forecasts, Sectorial Analysis.|
|Time Horizon||1 – 10 Years||1 – 10 Years|
In essence, value investors buy stocks for less than what they are worth, while growth investors buy stocks that display potential for huge earnings growth. That being said, you are not limited to one method. Buffett highlighted that value and growth investing are “joined at the hip”. Combining the two made Buffett one of the wealthiest men in the world. If you want to learn more about becoming a better investor, check out the investor track at INVEST Conference 2018 where you can learn how to navigate through the ups and downs of the market, harnessing different investment vehicles and strategies that will give you exposure to promising sectors.
Trade or Invest?
Wondering which is better? The answer: “it really depends on you.” Here are generally some of the key characteristics of both methodologies shown in the table below.
|Directional Flexibility||Bi-directional; profit from rising and falling market prices.||Profit from up-trending market prices.|
|Risk||High risk especially with leverage.||Medium risk. Smoothens out price volatility over the long-run.|
|Returns||Average of 5-7% /month||Long-run average of 10% p.a.|
|Costs||High transactional costs due to high trade frequency.||Low transactional costs.|
|Time||Varies according to the trading timeframe.||Due diligence can be time-consuming during the initial phase.|
Which one is for you?
Given that both methods are profitable if executed correctly, you should pick a method that suits your personality and lifestyle. Take the chance to explore either the investor or trader track at INVEST Conference 2018. To win a pair of tickets to the event, simply do the following:
- Like Capitalistlad’s Facebook page
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Giveaway closes on 12 January 2018. Winners will be announced on 14 January 2018. Jio a friend and take part NOW!