Investing vs. Trading

Investing vs. Trading Overview

There are two primary ways to build wealth through equity markets: 1) stock investing, 2) stock trading. While we cover some aspects of stock trading at UNEarned Inc, our preferred strategy by far is stock investing. One method is not better than the other if you know how to make money. But each method exists because they have different pros and cons.

Stock Investing

You can become super-wealthy through stock investing, but it may take decades and you can’t enjoy your money right away. You can even invest solely in dividend stocks that pay you a small percentage of revenue every year and never have to sell a single share of the stocks you own. Famed investor Warren Buffett’s Berkshire Hathaway company owns so many shares of Apple stock, they collect over $800 million in dividends alone each year and never have to sell a single share.

Stock Trading

Stock trading on the other hand can allow you to make profits very quickly – even within a day. Day Traders put upwards of ten, twenty, even fifty thousand on one trade, hoping the stock moves quickly in one direction just a few percentage points. That’s enough to make tens of thousands of dollars in one day. This method of trading has the highest risk, but also the highest reward. But not all trading has to be this risky – a swing trader may buy and hold a stock for a few months anticipating the company will have a good quarter and then sell those shares, making the same profit, but over months instead of days.

Which Do You Choose?

Risk tolerance, your amount of free cash, time, and a host of other factors play into whether you should be an investor or a stock trader. Many do both. The catch is to realize that some stocks are better for investing while some are better for trading. A stock with a huge market share, a product difficult to duplicate, and ever-growing free cash flow may be good to hold forever. “Forever stocks” are investments. A meme stock that is going up fast because of a fad, where you can make 50% in one month is better off being a stock trade. Even then, some stocks are good trades and don’t necessarily have to be meme stocks. If they follow a steady and predictable pattern, but never rise in price too much, they may make for good trading stocks.

Before you ever enter into any stock position, ask yourself if you are buying that stock for an investment or for a trade. Not knowing this is the first and biggest mistake many make. Entry price is much more important when buying a stock for a trade.