In this lecture, we will explain the difference between stock trading vs stock investing and when to select one instead of the other.
Stock Market Trading vs Stock Investing
So as you already may know, the market is either bullish or bearish. For the beginners, it means it’s either going up or it’s going down. For example, since March 2020, when we had the crash from the Coronavirus, we had a very bullish market after that.
Most of the stocks did unbelievable all-time records. Of course, most of that was based on speculations and not real value in the companies themselves. However, we succeeded in grabbing a lot of profits before we had a decline in March 2021.
When we do Stock Trading vs Stock Investing
For example, Tesla lost over 20% of its value. Many people say this will be the end of the bullish market. Others say it’s just a retracement and the market will continue positively. The truth is, nobody knows what will happen.
This is why we do stock trading vs stock investing.
When we do stock trading, it really doesn’t matter where the price is going.
Are we in a bullish or in a bearish market? It doesn’t matter because we hold the trades for a couple of hours or a couple of days.
Current market situation
Also, when we do stock trading, it’s easy to follow a couple of different stocks and take advantage of their movements. And sometimes, even if we are in the bullish market, so let’s say the market, in general, is positive, most of the stocks are going up. The indexes, Dow Jones, S&P, everything goes up.
However, within the day, some Stocks might drop, others might increase in value. And it doesn’t matter for us, right? Because we are taking the trades based on the current market conditions. We follow the strategies, the indicators, and we took the trades based on the current market situation.
So it really doesn’t matter if the market is going up the last three months or it’s going down. However, having different Stocks allows us to diversify the risk. So, for example, if Apple is going up today, but Google is going down, we can buy Apple and sell Google. It doesn’t mean that if the market is bullish, we have to buy Apple, Google, and all the other Stocks. Right?
We are looking at the current market situation, and this is exactly why we use exact strategies to follow when we do trading. Also, when we are trading, we can benefit by selling the Stock. And it’s a little bit different from short selling, which is most popular when it comes to stock investing and speculation.
So when investors do short selling, basically they are speculating that the price will lose its value. And with simple words, how that works is, if the investor or the hedge funds do the short selling, basically he would be borrowing the shares from the broker, selling them, and he has to buy them at one moment. Right?
So, for example, let’s say Apple is at $120 at the moment and one does short selling, they borrow the Stocks from the broker, they sell them. And if the price drops to $100, for example, they can buy them back and they will benefit from the difference of these $20 per share. So with very simple words, this is how short selling works.
Now, the problem is that there is no limit for the losses, right? Because Amazon, for example, does $2,000, $3,000, it can reach $5,000. There is no limit. Right? So all of that will be a loss for that investor who did the short selling. And at one moment, they will be just forced to close the position because they won’t be able to handle any more losses.
This is what happened with GameStop and the hedge fund that did the short selling. But the mass of small investors that were organized in Reddit and especially Reddit called the Wall Street mess. But I’m not going into detail. This is what just happened there. The hedge fund did a short sale for GameStop.
The mass of investors was much stronger, they pushed it and a huge hedge fund went into trouble. Now, when we do trading, we don’t take that risk because if we sell the Stock, we do it for a very short interval of time. A couple of hours could be a couple of days, we use a Stop Loss. Basically, we sell it but we say, OK, if the price goes another, for example, $20 higher, we are out.
Stock trading vs investing – what is the risk
And we don’t take any further risk because as I said, with short selling, the risk is unlimited. While when we are buying, there is no such risk because if we buy Apple at $120, the worst-case scenario is the share to drop to 0. So we would be losing the $120 per share. But when short selling there is no limit, there is no rooftop of the price.
But one more time, when we do trading, we actually open the trades for a short time, a couple of hours, a couple of days, maximum a few weeks. Depends on the market, but we have a Stop Loss that will limit the loss immediately if the price goes against us. And very similar to stock investing where we want to have a portfolio of stocks, this is what I do as well.
So when I invest in the long term, I keep a couple of stocks, or I have a basket of stocks. So very similar when we trade, we would like to have different stocks that will diversify the risk. As I said, we could be buying Apple, selling Google at the same time, we could be buying Amazon, selling Facebook. Depends on what the current market situation is.
So this is basically the difference between stock trading vs stock investing. At EA Trading Academy you can see learn more about stock trading works and what type of strategies we use when we do stock trading.