When it comes to making money in the stock market, two types of approaches usually come to mind – investing and trading.
Conventionally, people would say that investing is much safer for the average population compared to trading, due to the relatively lower stock market volatility over a longer period of time. But considering the fact that we are now in a bear market, if you invested in even some of the best companies such as Apple or Microsoft in the beginning of 2022, you’ve just lost around 30% of your investment over the past 6 months.
Is investing still better or safer than trading in a bear market? In this article, we compare the main differences between stock investing and trading, and discuss which one is better under the current market conditions.
KEY TAKEAWAYS
- Two very different approaches
- Benefit from different different time frame
- Investors and traders face different types of risks
- Investing and trading, each of its own
Approach
Although both stock investing and trading involve buying and selling of stocks, they have very different approaches.
Investors buy stocks with the expectation of capital appreciation over time. They typically rely on business fundamentals such as balance sheet, earnings report, industry trend, company management and other business metrics to evaluate the quality of a business and the stocks they issue.
They buy a stock when they believe the price is at or below fair value based on company performance and stock valuation, and usually only sell stocks when the business fundamentals, their investment strategy or market condition has changed.
Traders on the other hand take advantage of market volatility and profit from the stock price action. They leverage breaking news, market trends and technical indicators to decide whether to buy or sell stocks. They typically get into a stock position when certain technical and risk/reward conditions are met, and exit the position when profit target or loss limit is triggered.
Time Frame
When it comes to the time frame, investors usually hold on to a stock for years or even decades. Warren Buffett once said “our favorite holding period is forever”. By owning a company’s stocks, shareholders essentially own a small portion of the company. As the business of the company grows over time, so is the value of shareholders’ stock holdings.
As for traders, a typical holding period could be a few months, weeks, days for swing trade, and a couple of hours, minutes or even seconds for day trade. Traders take advantage of short-term stock price fluctuation, get in and out of stock positions quickly to profit from the price difference.
Risk
Volatility is the nature of the stock market, therefore both investing and trading carry a certain level of risk.
Investors risk their capital to bet on company performance and the economic condition. If company performance starts to go down, for example slowing revenue growth, or when the macro economic environment is worsen, such as high inflation, like what we are experiencing right now, investors would see the value of their invested capital to go down.
Traders bet their money on stock price fluctuation, hoping to profit from buy low sell high in a “long” trade, or sell high buy low in a “short” trade. If the stock price starts to go the opposite direction after entering a position, traders would either quickly close the position for a small loss, or hold on to the position hoping the price will eventually go their way, which would usually result in a much bigger loss.
Conclusion
So those are the 3 differences between investing and trading. Which one is better?
We are currently in a bear market, most stocks have gone down significantly, and the worst may still yet to come due to the increasing fear of a potential recession.
The current market condition is tough for both investors and traders overall, but more in favor of trading activities, for two reasons:
- There’s increasing market volatility where traders thrive and can take advantage of large price swings
- Traders can actually make money when the stock price goes down, thanks to the ability to “short” stocks
Does this mean stock trading is superior in this bear market and everyone should become a trader? Definitely not. Stock trading is extremely risky, and most short-term traders actually lose money. Trading skills usually take years of continuous learning and development, and even that success and profitability is not at all guaranteed.
Having said that, for those who are willing to put in the work and have higher risk tolerance, trading has the potential to become the golden ticket to freedom. Profitable traders can make money almost anywhere, anytime.
For the vast majority, despite the current market downturn, investing is still the best way to grow wealth over a long period of time.
Historically, the US stock market had always recovered from market crashes and recessions regardless of the magnitude of destruction. And in hindsight, these are the best times to buy stocks. Imagine you bought Apple stock through the lows of the 2008/2009 great recession, your investment would’ve grown 46 times to date!