Difference between Investing and Trading
First, let us understand the difference between investing and trading. Investing means building wealth gradually by buying stocks, keeping them on hold for an extended period of time, and riding out any unfavorable positions. Trading, on the other hand, means buying and selling more frequently, with the aim of acquiring the wealth now, the wealth is greater than the buy-and-hold investments. For example, investors may be content with 10%-15% annual returns; however, traders may aim for 10% returns every month. In general, investing brings larger returns, and trading brings frequent and smaller returns. Investors ride out less profitable positions, whereas traders must make their profit or suffer a loss. In general, five tips to become a Master at stock trading are:
- Be patient
- Do your research
- Follow the money
- Read about the markets (newspaper)
- Find a trader with a low commission rate
Types of trading
Most trading basically falls into one of two categories: fundamental trading and analytical trading. Fundamental trading is what Warren Buffet and others engage in. Analytical trading branches into day trade and swing trade. Before you begin trading with real money, try your hand in paper trading.
Learn the terminology
The stock market has its own terminology, which you need to know before starting to trade. Table 1 is a list of such words.
Table 1 – Terminology for Stock Market Trading
Bull Flag | Open Range Breakout |
Bear Flag | Cup and Handle |
Flat top breakout | Ascending Triangle |
1234 Product | Triple Bottom |
Micro 1 Min Pullback | Descending Triangle |
Red to Green Move | Inverse Head and Shoulders |
Bullish Symmetrical Triangle | Round Bottom |
Double Top | Bearish Symmetrical Triangle |
Falling Wedge | Head and Shoulders |
Fundamental trading
- Buy safe stocks that will not dive to zero at any point in the next 10 years.
- Such stocks should make up at least 80% of your portfolio. Coca-Cola is a great buy, as its stock has gone up steadily for the past 100 years. They increase their dividends every year.
- Certain banks are also considered safe. Some ETFs are also worth buying. What is ETF’s? Exchange-traded Fund (ETF) is a collection of stocks, such as a group of real estate stocks.
- Warning: Do not invest in the Technology industry, as that is considered very risky. Buy ETF’s in banking so that all of your eggs are not in one basket
- Invest like you would not have the opportunity to do so for the next 10 years (as per Warren Buffet).
Analytical trading
Analytical trading can be categorized into two main branches: day trading and swing trading. In day trading, you buy and sell stocks the same day, usually within minutes. If done effectively, you can make a lot of money, doing so. In swing trading, you buy stock and sell it the next day, or a few days later, or a week later. It is very short-term trading. Tips on how to be a Master in analytical trading are:
- Go to Investopedia for any words that you don’t know regarding stocks.
- Most of the money you will make is within the first 2 hours of the stock market opening.
- Remember that the less stock there is in the market, the more volatile in price it will be.
- Avoid speculation. Enough said.
- Learn Ichimoku (in analysis software) – this is a little complicated but very useful.
Summary
To become a Master in stock trading takes time and patience. You have to learn the terminology and learn when to buy and when to sell. Trading is divided into fundamental trading and analytical trading. Fundamental trading means that you hold on to stocks for a longer period of time and ride out the losses in the meantime. Analytical trading means that you buy and sell more frequently but with less profit than you would have in fundamental trading.
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