The difference between trading and investing

Are you a trader or an investor?

Trading implies buying and selling regularly. While investing usually means buying and holding.

But what if you plan to buy low and sell high quickly, but your trade only heads lower?

At this point if you decide to hold on and maybe even buy more to lower your average cost does the trade become an investment?

The truth is there is no clear distinction between trading and investing.

When you buy a stock there is only one button to press. 🙂

You don’t have the option of choosing “trade” or “invest.”

The transaction is exactly the same for both traders and investors.
The only difference comes down to psychology.

Where it would make sense to have a distinction between the two is for portfolio risk management.

You can dedicate 80% of your holdings for long term growth, and maybe have 20% of “play money” of which you can use to time the market and not worry about losing too much of it.

What about speculating vs investing?

The fundamental idea of investing in any asset is to buy low and eventually sell high. Even if you’re a long term investor you or your will’s executor will have to eventually sell your assets.

Speculation implies the same idea of selling high after buying low.

Perhaps the only difference between the two methods is duration. But if speculating is meant to be a quick flip, at what point during the holding period does it become an investment?

Or maybe speculating means gambling with your money because the asset you buy doesn’t have strong fundamentals backing it.

But fundamentals are subjectively perceived. Some believe gold is an investment and it’s historically been sound money for centuries. While others believe gold is nothing but a speculative piece of metal.

Some believe a real estate investment that doesn’t generate a positive cash flow is speculation. Robert Kiyosaki goes as far to say a house that is cash flow negative is a liability. And you don’t invest in liabilities. But if that was true then almost no one in Vancouver or Toronto can call themselves real estate investors because it’s been nearly impossible to cash flow a new rental property over the last decade, unless the buyer puts up an unusually large down payment.

Maybe the difference between speculation and investing is simply one’s understanding of the asset. If you do no research into a stock and buy it, you are speculating. But if you conduct extensive due diligence first then you are investing. If that’s the case then at what point during your research do you turn from a speculator into an investor?

At the end of the day I don’t think it really matter what labels we give to these actions as long as we’re making money. 🙂

______________________________________
Random Useless Fact:

Batman doesn’t kill criminals or hired goons. But he’s totally okay to rack up their medical bills.