The age-old question: to sell or to hold? Many investors find themselves stuck between trading and investing. So, what differentiates the two, and what's the best decision for your investment strategy? Let's have a look.
Investing (Long Term Stock Investments)
As an investor, the main goal is to build your asset portfolio over a long time. It requires a great deal of research and patience to know which stocks are worth buying and which ones to ignore. Most investors hold their stocks for several years, with others even holding them for decades, all the while enjoying their dividends and interests. Even though stock prices can fall, most investors end up with a tidy rate of return because their investments can withstand the downtrends. The goal is not to focus on the day-to-day changes but instead on the stock's growth over a long time. For example, say someone bought Zoom Video Communications shares on 26th April 2019 when the price was $66.22. On 16th April 2021, barely two years later, the same stock was selling at $329.95, which is about five times the initial buying price. That's a long-term investment such that even if the person sells the stock now, they will have bid their time and got their rewards. You can get more ideas on stocks that have performed well in the past and present, as well as some future projections for your next investment.
Trading (Short-Term Investments)
This method is much different from long-term investments. Instead of buying and holding, this type of investor wants to make profits based on short-term gains and losses in the stock market. The goal is to make much more money compared to buying and holding. In our example under investing, we saw an investor make about $260 per share over two years. Suppose this investor had 100 shares; this would be $26,000 in two years. Traders want to outpace such an investor, and they do so by buying stock at low prices and selling them at higher prices over a short period. They can also sell short by buying at higher prices before buying to cover at a low price when dealing with falling markets.
Traders rely on analyses to find the best trading positions, and they fall into position traders, swing traders, day traders, and scalp traders. The latter group holds positions for seconds into minutes before selling the stock. Position traders are a bit more like investors seeing as they can hold their positions from months to years.
From these explanations, we can see that both traders and investors want to make a profit. However, their strategies are quite different. Traders want to take advantage of the shifts in the markets over short periods and enjoy fast profits. On the other hand, investors want to buy and hold stocks and gain profits from the value increments.
Is any strategy better than the other?
Trading, as you may have already guessed, is much riskier than buying and holding. In fact, you will realize that most traders put in large sums of money they are willing to lose. The truth is that you have to be ready to put up a lot of money to get a worthwhile profit out of trading. Otherwise, your gains will be small and far between. Also, large sums enable you to reduce your commissions. The first question you have to ask yourself is, can you afford to risk your money? Are you willing to lose $10,000 on speculation?
If not, you have two options. You can go for long-term investments where the risk is pretty much lower, or you can start learning how to trade. Be warned, though, that there are many scammers out there who will offer to teach you how to trade, but you won't get much out of it.
Investing is the much safer choice which gives you good returns in the long term and lowers your capital gains tax rate. However, your returns will not be as high as those in trading. Keep in mind, though, that yours will have a higher assurance than those of traders.
There's no right or wrong way to go about making profits as long as you are diligent, committed, and understand where you are putting your money. Happy investing!