Trading or Investing?

Most advice is aimed at traders. You need to realise that investingĀ is different.


Investing is.....

When you buy an asset - say 100 shares in BP - you may do so with the intention of profiting from the subsequent flow of dividends plus an increase in the share price. You hope the dividend rate will grow. And an increasing share price will probably follow an increasing dividend.

You may chose to hold your shares for ever - in which case you benefit for ever from the dividend stream. Or you may chose to sell your shares at some point, maybe to spend the cash but more likely to buy some other asset. Whatever, during the time you have held the shares you have profited from the wealth, both actual and prospective, generated by the BP enterprise.

This process is called investing. It is long-term in intention. Though it may turn out to be short-term.

Trading is......

Alternately you may buy 100 shares in BP with the intention of selling them at a profit. You expect the price to go up. When it does, you will sell. It may be that a dividend will drift in while you are holding the shares but that is usually irrelevant to you. Your sole rationale is that you have judged, by some means or other, that the shares will go up. You do not care about the actual financial performance of BP, except to the extent it affects the share price.

This process is called trading. It is short-term in intention. Though it may turn out to be long-term.

Why should you be interested?

Because good buy/sell decisions depend on your knowing what you are doing. A sensible action for a trader might be wrong for an investor, and vice versa.

You might find a parallel in the antiques business. A fine piece of Dresden china might be reasonably priced, within your budget, fill a gap in your collection and be beautiful in itself. As a collector ('investor') it would be absolutely right for you to buy it.

It might also be true that a number of similar pieces are on the market and the regular Dresden dealers are lukewarm. As a trader it would then be absolutely wrong to buy it, because you would find it hard to re-sell. But it's the same piece of china.

So.........

Now, all this matters because you are bombarded with advice - from newspapers, TV, the man in the pub. But most of this is actually about trading, although it may not say so. Trading, after all, is fast-moving, sexy, glamorous and good copy. Investing is slow, grinding and dull. Which one sells the most newspapers? Which one do you want to discuss over a pint?

You are an investor. You have to be able to filter out advice aimed at traders (which is most of it).

For example

Here are some types of advice that may make sense to a trader but not to an investor:

  • Any recommendation based on charts, share price movements or 'market sentiment'
  • Any 'pattern slogan' - eg "sell in May and go away"
  • Any form of decision related to the price you bought at - eg stop-losses
  • Market gossip
  • Short term price prospects

And here are some things that may influence an investor but not a trader:

  • Company performance
  • Management quality
  • The business economics
  • The business plan
  • Risk issues, and particularly asset allocation
  • Personal tax issues
  • Long term value
  • Long term economic trends

To sum up........

Most successful market operators combine some elements of both investing and trading. But this website is not for them. This website is for inexperienced savers. And to you we would say:

  • Trading is a technical process requiring a lot of skill and even more experience. You don't have either.
  • Most published commentary is for traders, not investors. Therefore you should ignore most published commentary.