Trading stocks vs. investing in stocks
If you are not particularly interested in finance or the stock market, you may not spend a lot of time thinking about trading stocks versus investing in them. Many people might not even have a good understanding of the difference or why one might be better than the other for your lifestyle or financial goals.
For an explanation of that and more in the realm of money matters, I consulted a true expert, Guy Adami. He's the managing director of Drakon Capital and is an original member of CNBC's Fast Money Fast Five panel.
When it comes to understanding trading as opposed to investing, traders look for short-term opportunities and for opportunity on both the long and the short side, Adami explains. Investors tend to be more focused on finding stocks/securities that they feel are going higher. He says traders are focused on the minute-to-minute price movement of their stock. "Investors tend to filter out the day-to-day noise of price fluctuation. They are looking at the big, long-term picture."
As you might imagine, trading takes a certain time commitment, as you have to be on top of what a stock is doing at all times during the trading day. Also remember that each online trade usually carries a fee. You have to have a certain mindset to be a trader. "Traders tend to enjoy, even thrive on taking risk. Although by definition, all investing involves risk, investors tend to be a bit more risk-averse," notes Adami. "Traders change course dozens of times in a single day. Investors tend to stay the course."
So maybe you think you would like to engage in some of both -- trading and investing? I asked Adami how, or if, this can work.
"In my opinion, it is virtually impossible to do both simultaneously. Why? Because if you try to do both, this scenario typically plays out: An investment that does well right away tends to turn into a trade, while a trade that does poorly right away tends to turn into an investment. Think about that for a minute."
Choosing long-term investments can hinge on many variables, including whether a stock pays a dividend, is a company you believe in and want to support or, as Adami points out, is simply a stock you think will go higher over time. For instance, I like to own stock in companies I do business with, such as Starbucks, because I know if I am getting good products and service, and if not I can get out. Adami is not as confident in my method, telling me, "although the 'boots on the ground,' Peter Lynch method of investing clearly works for some, I believe that buying a stock based on your business dealings with the company is a 50/50 proposition at best."
Last year gold was the talk of the investment world, hitting record highs. Is it still a good investment now? "I think gold continues to be in a very well-defined long-term trend higher. For the layperson, attempting to trade gold is virtually impossible," Adami says. "But if you can stomach the gyrations that accompany the commodity, staying with gold continues to be the right course of action."
Both trading and investing in stocks offer risks and rewards. You have to carefully weigh your options and study your chosen targets to best prepare yourself to compete. But isn't that true with most good things in life?