Can I be a Stock Trader and Investor at the Same Time?
Is investing … trading?
Is trading … investing?
As I write, there are many people who got the two mixed up, thinking that they are the same. It has added to the confusion of what investing (or trading) really is in their essences. The results are catastrophic. Without realising that they are different, millions had lost trillions of dollars in the stock market.
Before I answer the question above, let me get this straight:
‘Investing is not Trading.’
What is Trading?
Trading is an activity that aims to profit quickly from stock price movements for the short-term. The holding period of a stock can be as short as mili-seconds to seconds, minutes, hours, days, weeks, and a few months. In essence, the act of trading is likened to one who manages a grocery store and views that his stocks as ‘inventories’ like soft drinks, snacks, toiletries, … any products in the store.
The store manager buys a product (Coke, for instance) at cost price of $0.60 per can and displays it for sale at $1.00 per can. He hopes to profit $0.40 per can on a regular basis as quickly as possible. Thus,
‘Traders View Stocks as Inventories’
Successful traders aim to earn net trading profits by boosting either their profit per trade or their trade win-loss ratio. It means, they acknowledge the fact that they will not make winning trades all of the time. Trading losses are normal.
To them, if profits from winning trades exceed losses from losing trades, they’ll make a net trading profit. If traders are to record their transactions, they would look similar to how a store manager prepares his accounts for its store.
Trader – Month 1
|Stock||Cost Price||Sales Price||Profits / Unit||Units||Trade Profits|
|A Ltd||$ 1.00||$ 1.20||$ 0.20||3,000||$ 600|
|B Ltd||$ 0.50||$ 0.35||($ 0.15)||5,000||($ 750)|
|C Ltd||$ 2.00||$ 2.20||$ 0.20||2,000||$ 400|
|Trader’s Month 1 – Net Trading Profits||$ 250|
Store Manager – Month 1
|Stock||Cost Price||Sales Price||Profits / Unit||Units||Trade Profits|
|Product A||$ 1.00||$ 1.50||$ 0.50||5,000||$ 2,500|
|Product B||$ 2.00||$ 5.00||$ 3.00||1,000||$ 3,000|
|Product C||$ 10.00||$ 15.00||$ 5.00||500||$ 2,500|
|Store Manager’s Month 1 – Net Trading Profits||$ 7,500|
What is Investing?
Investing is an activity to build long-term wealth via long-term price growth and receiving consistent dividend income through accumulation of stocks. Thus, the holding period of a stock can be for years or as long as the investors are alive or in some instances, to their heirs (multi-generation). In essence, they view that a stock is a business and if it is good, it is like a money-making machine which can churn out money to their shareholders consistently for the long-term. Thus,
‘Investors View Stocks as an Asset / Business / Money-Making Machine’
This is why investors assess a stock’s business model, its management, financial results, future plans … etc to determine if it is worth investing and keeping over the long-term. To them, a stock purchase is businesslike and they intend to buy and accumulate as much shares of these good companies as possible when the trading prices are low and undervalued.
This is important because buying good stocks at low prices will further enhance their return on investment (ROI), be it capital gains or dividend yields.
Back to the Question:
Can a person be a successful stock trader and investor at the same time?
In my opinion, the answer is ‘Nope’.
You can be a successful stock trader. You can be a successful stock investor. But, I think you cannot be successful in both at the same time. Why? This is because the mindset and skill sets required to be successful for trading and investing are very different. They are as different as night and day.
What to Do When Stock Price Drops?
Would you cut your losses? buy more? Or hold onto it and pray for recovery?
What would you do? That defines you, be it a trader or an investor. If you opt to cut losses, you are a trader. If you opt to buy more, you are an investor. Finally, I think you could be a naked speculator if you opt to pray for a recovery. Naked is a term that I used for people who buy stocks without any specific plan, which is likened to one who walks into a battlefield without armory or shield.
You see. Investors react to a fall in stock price differently from traders.
From a trader’s point of view, he cut losses to protect his gains or capital from a possible continuous fall in stock prices.
From an investor’s point of view, he may opt to buy more to enjoy discounts for his stock purchase. If an investor is willing to invest in a stock at $1.00 per share to earn $0.05 in dividends per share (DPS), wouldn’t it be a better deal if he can buy it for $0.95, $0.90 or $0.80 a share?
As such, it is impossible to be both at the same time. It is best to choose one.
Which of the Two is Better?
Is investing better than trading? Or, is trading better than investing?
Pardon me. I think a better question is: ‘Should of the two suits you the best?’
Here, I’ll list down a few key considerations so that you can decide better:
Do you have a full-time job or a full-time business? If yes, then, I think, it is better for you to opt investing over trading. Why? This is because I find that trading is an active activity which requires more time to learn, master, and practice to be good at it. Meanwhile, investing can be done passively as you do not have to keep making transactions in order to be successful. As Warren Buffett had mentioned,
‘You Don’t Get Paid for Activity. You Get Paid for Being Right’.
Are you a high income earner? If you are, you may consider investing as I believe that you should allocate more time and resources on stuff that makes you the most money, be it your job or business. I don’t think it is smart to shift your focus away from your bread and butter to trade.
With that being said, if you are not a high-income earner and intend to start trading for income, please don’t if you think that trading will make you lots of money in a short span of time. Many started off thinking like that but very few succeeded. The ones who had succeeded have paid a huge price to get to where they are today. Therefore,
‘If You Don’t Want to Learn (could spend years and lots of money) to be a Good Trader, then, don’t Trade. Trading is not a Quick Way to Riches.’
Traders use technical analysis (read charts) to trade.
Investors rely on fundamental analysis (read financial reports) to invest.
So, which of the two do you think is easier for you to learn? If reading a lot of financial reports is your ‘thing’, you may consider investing. If you like charts, then, you may consider learning how to trade.
I believe you can’t be both trader and investor at the same time.
But, it is okay if you have different views from me on this matter. At the end, it’s about what works for you that matters.
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Thank you, Ian, for your opinion. It’s not what I really wanted to hear, but I believe you are correct. I’m trading Ethereum but also am looking to hold for the long term. I have real conflicting feelings when exiting trades because of the fomo when it goes up. I started comparing the equity gain from trading to what it would be if I was purely investing and holding. It’s probably around even at the moment, but I think it’s very hard to maintain a pure trading mindset when there’s a nagging feeling about missing out in the back of your mind. After reading your article, I think I need to switch my asset class (or even just the crypto that I’m trading) away from my investment. Thanks again for your views. It’s given me a great deal of clarity. I would be interested in finding out if anyone else out there has been trying to do what I have been doing.