Is Investing in Stocks Better than Trading Stocks?

Investing and trading are not really two sides of a coin as many people think. They are not opposite things. The only difference in my view is the risk a trader takes for a given trade that determines whether they are investing or trading in stocks. Many people easily fall into the belief that investing is better than trading. Let me shatter this myth in this article and show why the contrary is actually true.

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Investing is a One Time Shot

Investing appears to an outsider to be similar to gambling. But to the investor it is not really so. Though it shares a lot of similarities with gambling and many so-called investors practically gamble with the markets, there is an aspect that makes these people slightly different from gamblers.

Investing is like a one time bet or one time shot. You will make it or break all in your only one attempt. For this reason investors study the markets and stocks and their background companies, economy in general before making their bets. Though this is time consuming task and also full of domain knowledge, this is what makes the investor’s bets better than gambling. Any trade done without a plan or reason is just gambling and returns from that can be attributed to plain luck.

Investing and Trading Both Help Each Other and the Economy

Investing money does not necessarily go into stocks. It can go directly into the business of the companies if not stocks. Even the stock market investments start for a company by investing directly for the growth of the company though initial public offers. Hence investing is more closer to contributing to the economic or industrial activity. It has a direct impact on the companies.

Trading is indirect. It is not a waste thing as many people think, who like to be called as investors. Without traders there cannot be a market as we see everyday. Traders make the bloodline for the market and keep it flowing everyday for the functioning of the markets.

If traders are not there then it will be a hard time for investors. The long term investors from large institutions need enough volume on any day to make a position into stock. Traders help build the momentum or volume for the day so that these investors can buy the stock easily without putting orders lower and lower with every transaction. It is basically the liquidity that traders contribute everyday to the markets.

Liquidity is important for not just stock markets but any business. Even if the economy is not good, enough liquidity can temporarily create rallies and sustain a short term bull market as we see today. Liquidity implies that it will be easy to get in and out of stocks with ease and without moving the price of the stock very much. Highly liquid stocks can be bought in thousands or even millions on single day. This is all due to the presence of traders who generally concentrate popular companies’ stocks.

That is how investors and traders work to create a stock market as we see today. No matter how old or new the technology is there were always traders and investors in the history of stock exchanges. Both contribute not just to create a market but in fact to help the turn-arounds or major growth phases of listed companies in the country.

I saw many people who think that stock market is like a casino and traders and investors are like gamblers without really contributing anything to the society. That is not true. In fact it is a part of our modern culture. It plays a great role in helping the economy and works like a virtual money lender which has more flexibility than banks or finance corporations.

Most of the people who start trading stocks, slowly start their bias towards investors. They think that investing is better than trading because they do not realize that trading is also like any other discipline. It is not just trading even investing does require same kind of study and effort on the part of the market participant as does their other businesses.

Investing is Not Low Risk Option But Trading is!

People tend to move towards investing because they think of the timeframes involved without bothering about how risk changes in the overall equation. There is a general feeling that investing involves low risk where it is exact opposite. Also people flock to investing because it gives them lot of free time to concentrate on their daily business. This is because they do their job only to certain extent as much as their current knowledge tells and get convinced there itself.

In fact investing is far more riskier than trading. It is because you do not have stop loss protections. I saw many traders who call their trades as investments when the trade turns into a loss. Instead of taking the loss they change their mind and plans, to let the stock do whatever it wants. They give more time for it thinking it will recover in a “long period of time”. Hence they name it as long term investment.

It is amazing how people shift their thoughts so easily when it comes to trading stocks. They also shift their identities as a trader to investor without much trouble. But the fact is that all big losses first start with initial small loss. A trader cuts them short and books them. An investor lets it become bigger and bigger until finally selling the stock when it just starts a turn around. How many times can you remember doing this in your own experience? I think many times unless you are learning your lessons.

Such is the risk involved with investing. You may now point out that same will hold true when it comes to making profits. By holding the investment long enough the investor stands to gain bigger. Let me tell that the reality is quite different. The stock can behave like that but not the investor. There are several reasons for this.

First of all many investors book profits soon because they can’t have an idea when to close the trade. That too they do it more often during uptrends much like they let the losses increase during downtrends. If an investor is sitting tight to hold the stock during uptrend it is much like the quality of a trader who does the same thing but with more certainty. Because the trader lets the market gives its signal while the investor looks for things that indirectly affect the market. These indirect things many times go out of phase and make the investor lose sight of the best price to get out of the position.

Investing is Not Necessarily Long Term

But there is another little catch here. Apart from the uncertainty of exiting that investors face, they also face the problem in time dimension. People think that investing is good because it is about long term. In fact the long time means either long term gambling or long term trading.

The stocks in reality make their biggest moves in only a short period of time. You can check all of stock markets histories. You will find that stocks spend a lot of time moving here and there. But only a part of the time they spend moving straight in one direction. It is only long term traders that get to catch this portion and make the best killing if not the maximum possible made by those bought at the bottom. Generally those who buy at the bottom fail to call the top at the right time.

The Reality of Long or Short Term When a Stock Moves…

The stocks move in a short period of time with all intermediate trends concentrated in that same time frame. Investors think that by capturing a stock for all its life time will increase the chances of grabbing its golden period of rising. That is actually gambling in the time dimension. Because you may be studying the stock and its company but leaving the timing for luck. Even the most successful investor Warren Buffet made the right timing for his entries and exits. All the principles will go into the ash if timing is not taken care.

Trading is Superset of Investing!

Don’t judge investing and trading based on false beliefs shaped by your trades that went bad. Learn lessons from them. Just take a step ahead and look at the reality. Trading offers more flexibilities than investing. Trading does not only have to be about day trading. It is like a superset of investing when it comes to the time and effort involved!!

Related Articles

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• Buy Low and Sell High: Why You will Not Succeed in the Long Run with This Myth?
• Trade with the Money You can Afford to Lose: Another Myth in Stock Trading
• Someone Loses When Someone Gains: Do You have This Belief about Stock Markets?
• How You Should Use Diversification in Trading Stocks?

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Someone Loses When Someone Gains: Do You have This Belief about Stock Markets?

There is a theory or belief particularly in the minds of intelligent people who do not easily enter into stock trading. These people not only think that someone loses when someone gains, they also try forcing that belief on to others. Their perspective about the stock market is no different from a gambling casino. You need to clear yourself off this belief before you can become a successful stock trader.

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In my experience as a trader, I have met people with several different perspectives on the stock market. Some people think of it as a better place to invest and earn money in the long term. Some people are not even aware of it. Some people know there is one but don’t know much about it and do not even try to remember when they are given little information. These kind of people, lacking focus, waste a great deal of my time and I often avoid giving any information to them.

Intelligent People too Tend to have False Beliefs

There are other people who know more about the market but they have their own in built theories about them. These people are intelligent in their professions but can’t appreciate the variety and uniqueness of other professions. They go with their own assumptions without taking a step further to understand the reality. It was such a person when I met I had to dwell upon this theory.

The stock market is very different from a gambling casino. The simple fact, that gambling casinos are illegal in many countries but not the stock markets are, can tell a whole lot about their difference. The gambling is made illegal simply because this theory works at its root. You cannot make profit without somebody paying for it. You may have luck or whatever you say the reason for it, but that must be compensated by bad luck or whatever on someone else.

Stock Trading is No Closer to Gambling

Stock trading is not at all closer to this principle. No one needs to lose to make someone gain from the market. The beauty of stock market is that everyone can make money at the same time. The other way is also true. That is everyone can lose money at the same time as it happened last year, if you can remember the great falls (of blood) in Dalal Street ;).

When you plainly look at the simple way the market works it appears to be true that someone has to lose when some has to gain. For example, you bought a stock for a certain price at one time and sold that at a higher price for another person later. Now you made a profit. The other person whether makes a profit or loss is not immediately known because he/she has yet to sell the stock. But it is easy to see that we assume the market price of the stock to be your buy price and the other person’s buy price. So we conclude that this new entrant bought stock at a higher price than its true value, eventually bound to make a loss.

The Stock Market is Not a Simple Independent System

People also take a broader look at the market and validate this belief for themselves. For examples in gambling if someone wins someone else loses. On the overall no money is coming extra into the system, so this looks like a closed system and works well with the principle. When they look at the stock market as a system, they also see it in the same perspective. There is no money that is coming in from elsewhere which does not take it back. Hence this theory should apply well to stock market as well, right?

No. What they miss to see is that stock market is not just a simple closed system like a gambling casino. It is not independent of our society. But it is a highly complex system working in basic principles and completely dependent on the modern society, culture and lifestyle for its foundation, survival and till the end of current civilization.

The stock market movements closely correlate with the industrial development or progress of the companies that are listed on the exchanges. And the companies pump money into the system in the form of dividends at regular intervals without asking any return from the stock market. They do this till the company is delisted from the exchange. Till then the shareholders are partners of a company and not just gamblers.

The Money Flows Into and also Out of the System

The companies when getting listed at stock exchanges actually borrow money from potential investors for their expansion or any purpose related to further growth of the company. This is done through IPO (Initial Public Offer). This is where the company takes the money from shareholders. Or from the stock market if it were a simple independent system.

But every time the company announces dividends (atleast once in a year), the company pays as much as 10% on the borrowed capital. The company continues to pay this much of money till it is acquired by a different firm or goes bankrupt or gets delisted. In all these actions except bankruptcy, shareholders still stand to gain unimaginable profits because offers for these events are more than the market price at that time and even far beyond the price at which the stock is sold through IPO to investors.

The only time when the stock market gets worse to investors is when the modern civilization turns in reverse direction for whatever reason. This happens when the world’s countries fight for natural resources and natural resources get depleted enough. For any development in a society what is the extra thing that is needed is the availability of a resource. When that is there development of industries, agriculture and everything manifests. The workforce is a secondary thing but that is determined my human nature.

When the stock markets do mayhem, when companies go bankrupt, still this principle does not apply. Because this time every investor or trader holding the stock loses money. There is no one gaining when everyone is losing. Of course the company may be what you think but when it is bankrupt what does it stand to gain. You may think of even more losers who have lent money to the company in other ways but that is all outside of the stock market as a simple independent system.

Don’t worry about bankruptcies and all. Generally when they happen you will lose in someway even if you do not trade stocks. This is part of the risk that trading entails and you agree when you signup for your trading account. But because it is risk it also implies great rewards for traders with proper strategies. Except bankruptcy case all other events in the stock market hold gains for the shareholders who hold it till gain.

The True Beliefs You Should have About Stock Trading

There is nothing like someone must lose so that someone else can gain when it comes to stock trading. The true beliefs a stock trader should have are these:

Every one makes profits at the same time
Or
Every one makes losses at the same time
But everyone stands to gain over a long period of time.

That is, the money comes into the system in the long term. The fundamental belief here is that our civilization continues to advance and it did so for many centuries in the past.

People who believe in this myth never enter the stock market. It works like a blockade for them. And who have already been trading, never be able to become successful trading making consistently right bets. Because this belief will continue to influence their decisions and learning.

This is high time you too should get over this. Learn the right belief as I mentioned. That will give a paradigm shift which enables you to gain when there is sunshine and cut losses when there is bloodbath.

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