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The Difference Between Trading And Investing

Posted by on Aug 26, 2010 in Investment Management | 21 comments

I want you to imagine that you are in one of my finance seminars right now. You are seated in the middle row and you are here because you want to understand how to grow your money.

As the seminar begins, and after I make everyone feel comfortable, I pause and look into the crowd and ask a simple question. “Can anyone tell me; is there a difference between Trading and Investing?”  A few hands go up and I pick one. “Sir, investing is putting your money into an asset and making it work for you”. “Good”, I say, “…and what about Trading?” “Well, sir trading is buying and selling”. “Very good, okay, how about you?” I point to another person. “Investing is long term, trading is short term”. “Fantastic! Thank you for your very concise answers, you are both correct, now let me summarize and simplify so that everyone understands: Investing and trading are both being able to place your money into assets and make it work for you, both of them are also buying and selling, the difference is, investing is buying and selling on a long term basis while trading is buying and selling on a short term basis.”

Then I joke around. “Of course many of the experienced investors in the room know that Investing is also known as ‘Buying and Praying’” Which elicits a healthy amount of laughter. And I continue “…And those of you experienced traders in the room also know that Trading is ‘Buying and Praying Faster!’” And the room gets hysterical. I continue with another question: “Okay, raise your hands, how many of you want to make money by waiting a few years (Long term) to see some returns?” About a third of the room raises their hands. “Great! Now raise your hands if you want to make your money even faster!” Almost everyone in the room, even those who said they wanted long term investments raises their hands. “Ah, greed is in the air today I see…Now let me ask you, why do you want to make money faster?” Someone shouts, “Para yumaman ng mas mabilis!” (“So that we can get richer faster”) And the room starts to laugh again as everyone has the same mindset. So I continue “Very good, I know exactly what  you mean, everyone wants to get rich as soon as possible.”

Then I ask a few more questions: “So, how long would it take for you to double your money in a long term investment?” The crowd begins to chatter and you can hear people saying certain investment types and attaching the amount of years it would take for that investment vehicle to double their money. Some say 5 years, others say 3 while others say 10 years. “And how long would it take to double your money in trading short term?” Then the crowd randomly mentions a few numbers, some say 1 month, 3 months, 1 year. “Okay guys, that’s great, now let’s just say, for long term investments, and for arguments sake, can we agree that if you pick the right vehicle and you invest at the right time, you can actually double your money in 1 year?” The investors in the room nod. “Okay then, now for the traders in the room can we agree that for short term investments, you can double your money in 1 month?” A person from the back shouts “Actually Sir, you can double your money in 1 week, especially if you time it correctly!” And I myself nod and continue “…That’s true, but let’s just say 1 month to be a bit more conservative, can we agree? Good, now let me ask you guys, if you can double your money in a long term investment in 1 year, can you also lose all of your money in 1 year?” The room unanimously agrees, Yes they say with a vengeance. “And for short term traders, if you can double your money in 1 month, can you also lose all your money in 1 day?” The room, especially the veteran traders, vigorously nods in total agreement. ‘Absolutely’ is what I hear some people say as I press on.

“Good! Now, do you still want to make money in the short term knowing that you can also lose money faster?” then suddenly the room starts to ponder and quiet down a bit, and I can see some people beginning to realize the ugly truth about trying to grow your money whether for the long term or the short term. Everyone wants to make money fast, but my question made them realize that they might not want to lose money –slow or fast.

So I look around the room and I speak to them as I am speaking to you right now.

“Well, if you ask me, I would still want to make money in the short term even if I know that I can lose money faster, because and remember this, if you lose money in a long term investment, you don’t just lose your money, you also lose something far more valuable, you lose time. Remember my example above? If your long term investment made you lose money in 1 year, you lost your money and you also lost 1 year of your life — something that you can never get back…. Now if I lost my money in the short term, say 1 month. I lost my money, but only 1 month, which means I still have 11 months in the year to decide on what to do with my life!” And the crowd laughs and smiles in unison as if they saw clearer into their future on how they might tackle how they will grow their money. They nod in simple agreement and like them, I hope that you now understand in more practical terms what the difference is between Trading and Investing.

 

 

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21 Comments

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  1. CARLOS PUNZALAN

    THANKS MARK. I HOPE MAJORITY IF NOT ALL UNDERSTAND THAT BY ELIMINATING GREED, TRADING OR INVESTING WILL HAVE ONLY ONE MEANING: FINANCIAL INDEPENDENCE.

    • markso

      Hi Carlos, thanks for writing in, perhaps to control, temper and moderate greed. I don’t think anyone can totally eliminate it as it is the driving force to make you want to risk investing in the first place.

      • CARLOS PUNZALAN

        THANKS MARK. IF I MAY ADD WITH HINDSIGHT, KNOWLEDGE IS DIFFERENT WITH UNDERSTANDING. ONE MUST ALWAYS STAY WITH HIS OR HER CIRCLE OF COMPETENCE AND ENJOY THE PROCESS OF TRADING OR INVESTING MORE THAN THE PROCEEDS. ( madaling sabihin pero mahirap gawin, hehehe)

  2. Josephine Q. Yu

    Totally agree with what you said. Thanks for making me learn the difference between trading and investing. In summary, you would prefer trading than investing. One question i would like to ask is: What is your opinion about investing in condo units?

    • markso

      Hi Josephine, it depends on how you plan to make money out of it. Rental or to flip? Both are okay but do know that Condo’s unlike land will depreciate over time due to wear and tear so the money has to be made within the first 5 years, otherwise it becomes a liability after that time.

  3. Gleeko

    Just my opinion Mr. So. I’ve read articles that in the long run, stocks really go up so you definitely won’t lose when you invest unlike in trading, you gain faster but you lose faster as well. No wonder one of the billionaires in the world is the greatest investor, Warren Buffett, and not the greatest trader.

  4. fae

    thanks for publishing things like this for free. this i very helpful, especially for people like me who doesn’t want to pay YET for financial seminars, (coz i’m saving really hard) :)

  5. Matthew C. Kriner

    First of all I would like to thankyou for this wonderful and informative post. I was googling around and found your blog and liked it very much. I would also recommend this to other professional bloggers.

  6. Matthew C. Kriner

    You have done a wonderful job by sharing this blog post here with us all. I am impressed with the writing style and the presentation. I will definitely recommend your blog to other professional bloggers as well.

  7. JB Cabig

    Great post Mark 😀 so i guess if your gonna go into a long term investment it should be in a low-medium risk one 😛

  8. Thirdy

    Seems like lectures tend to be the same at a point… Feels like this is what happen at the beginning of the forex orientation I attended…

    But these part of the seminar is important and it is nice to be reminded in this blog…

    More power!

  9. Ronald

    This is such a timely reminder. Wonderful article! Yes, I agree, we learn by repetition. Simple things almost always got lost immediately. Good thing you and your wife are very unselfish in sharing your expertise. Great new site! Keep the very useful articles coming.

  10. Dennis Arnoldi

    Simply wanna tell that this is very useful , Thanks for taking your time to write this.

  11. Omar Kaggi

    Just wondering if you could tell me whats the ideal way to invest, stocks or Forex? I am an OFW worked as nurse but zero knowledge in investing albeit I already lodge 100k in stockmarket, my broker has not advice me yet which company shares to buy. I dont know which to choose, if blue chips or speculative, since am still planning to go abroad to earn for my retirement hopefully. Is Equity managed fund also good to invest in a certain bank? please advice, thank you so much!!!

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