Investing vs. Trading
If you have searched for ways to enter the stock market, you probably heard of the famous investing vs. trading debate. In short, we've come to the conclusion that trading is bad and investing is good. This is actually not entirely true, as a good investor will incorporate both trading and investing strategies to beat the market.
Traders will mainly use technical analysis to make quick buy/sell decisions in the market. Technical analysis incorporates charts, statistics, quants and anything that screams "sexy" in the financial world - hence the reason why many youngsters flop to r/wallstreetbets to flex their high returns to claim their ultimate trader status. This requires tremendous amount of luck, and quick mathematical reflexes to calculate risks in a highly time-pressured setting. Today, many of the large financial institutions incorporate this method with AI and machine learning to time their entry into a long-position (buy-and-hold), meaning the traditional trading practice for short-term profit is more common amongst individual investors like us.
So knowing this, why do we still trade? This is because we are naturally more inclined to act on emotions. We are also generally bad at trading, despite of how adept we are with numbers. We are bound to make decisions based on what we think is the "right" price - perhaps out of fear, or greed. This will continue to impact our decision to buy and sell stocks prematurely, even while the statistics prove otherwise.
Investors, on the other hand, will primarily use fundamental analysis to gauge whether the stock is a buy, hold or sell. Fundamental analysis incorporates a combination of subjective and objective valuation of the company, and determination of economic moat that is built into the business. An economic moat is a competitive edge that the business has compared to its peers. Investing will generally consist of a long position into a company to eliminate the short-term ups-and-downs (volatility) of its share price, while hoping the economic moat will eventually generate some returns over the next 5-10 years of holding.
Similar to trading, investors can also become victims of behavioural investing. It's normal for stocks to go through volatility, and this may cause some investors to act based on emotions. The main goal of investing is to remain unaffected with this price swing, and holding the stocks while the economic moat is still in place. However, greed and fear gets to us all, making this a challenge for many people who are looking to benefit from investing mindset.
While I generally recommend people to become investors, some trading attributes may help us understand the evolving nature of the market, and shape our portfolio accordingly. As you follow the market using a combination of technical and fundamental analysis, you will be granted with the perspectives of both investing and trading, helping you to make decisions based on market economics as well as the underlying value of the companies.