Investments

There is a question which is sometimes asked by those new to the financial markets, and even occasionally debated by experienced participants. That question is how one differentiates between trading and investing. Because both trading and investing - when one considers them from the perspective of the financial markets - are performed in very similar fashions, they are often thought of as interchangeable actions.

Bank Of America Investment In my book, The Essentials of Trading, I followed along with this basic theme by introducing the idea that what differentiates the two is scope definition. Both trading and investing, after all, are at the most simple of levels application of capital in the pursuit of profits. If I buy XYZ stock I expect to either see the price appreciate or earn dividends - perhaps both. What separates trading from investing, however, is that generally in trading one has an exit expectation. This might be in the form of a price target or in terms of how long the position will be held. Either way, the trade is seen to have a finite life. Investing, on the other hand, is more open-ended. An investor will buy a company's stock with no predefined notion of when he or she will sell, if ever.

Investment Opportunity We can use examples to help demonstrate the difference. Warren Buffet is an investor. He buys companies which he sees as somehow undervalued and holds on to his positions for as long as he continues to like their prospects. He does not think in terms of a price at which he will exit the stock. George Soros is (or at least was while he was still actively running his hedge fund) a trader. His most famous trade was shorting the British Pound when he thought the currency was overvalued and ready to be withdrawn from the European Exchange Rate Mechanism. The position he took was based on a specific circumstance. Once the Pound was allowed to float freely, and quickly devalued in the market, Soros exited with a handsome profit. That meets the criteria of having a predefined exit, making it a trade, not an investment.

In 1996, time management of the family's investments. His investment focus has been in publicly traded equity investments in high technology companies. ups, an Internet bank and real estate. He has also invested in private Asian investments.

Banc Of America Investment There is another way one can define trading as set against investing, though. It has to do with the manner in which the applied capital is expected to produce a return. In trading the appreciation of capital is the objective. You buy XZY stock at 10 expecting it to go to 15 and thereby produce a capital gain. If dividends or interest are paid out along the way, that is fine, but likely only a minor contribution to the expected profits.

One of the key differences between trading and investing is the time frame of the transaction. Traders typically buy and sell in a short time frame, which could range from a few seconds to a few weeks or more. An investment, on the other hand, is typically held for several months to several years or more. .

Banking Investment In contrast, investing looks more toward income over time. That makes income production, such as dividends and bond interest payments, the major focal point. Do investors experience capital appreciation? Sure, but unlike in trading, that is not the prime motivation.

. Next beatrisabog1987 . 28 August 2008 @ 30 am Investment advisors There are lots of things which you can invest, and lots of things than you can invest in. When the investment subject is money, the choices and the processes can be overwhelming so it is wise to enlist the help of an investment advisor. To invest money is to commit funds or capital in order to build a financial gain.

Investment Solution Strategic With these definitions in mind, consider what many people refer to as their single biggest investment - their home. Based our second definition of investing, however, a home is generally not an investment because in most cases is does not produce any income. In fact, it produces considerable expenses in the form of mortgage interest payments, utility bills, and upkeep. If anything, a home is a trade. We buy it and hope for its value to rise over time, increasing our equity. And the fact that many people expect to move in only a few years and sell at that point makes it even more of a trade rather than an investment. (Of course own rental property can certainly be viewed as investing, unless one is flipping it, which would definitely be more trading.)

Real estate can be a wise investment but beyond purchasing a home of your own, what is the best way to invest in real estate without getting your hands dirty and spending your spare time chasing tenants for rent A REIT or Real Estate Investment Trust may be the perfect investment vehicle. REITs own, and often operate, real estate but are publicly traded like stock. Profit is paid as dividend to stock owners.

Investment Banking Services As noted earlier, for many people trading and investing seem like the same thing. The mechanics of buying and selling are basically the same. Sometimes the analysis one does to make those decisions is identical as well. It's the intention and definition of objectives which separate trading and investing, though.

Bank Investment John Forman is author of The Essentials of Trading, and a near 20 year veteran of trading and analyzing the markets. For a free e-book on getting started in trading, click here.

Alternative Investment

Online Investment Services John Forman, author of The Essentials of Trading, is a near 20-year veteran of the financial markets. He holds an MBA from the University of Maryland and a BS from the University of Rhode Island, both concentrating in Finance.

John has traded just about everything an individual trader is likely to trade. He has worked as an analyst in the foreign exchange, fixed income, and energy markets, and has published literally dozens of articles on market analysis and trading methods. John is the former Content Editor for Trade2Win, a trader support web site with over 50,000 members, where he interacted regularly with active traders from across the globe. He is also a regular speaker to college finance student groups and helps finance faculty integrate trading elements in to university course offerings. In fact, The Essentials of Trading was developed based on his work in designing trading course materials and curriculum outlines.

Currently, John is a principal of, and the Managing Analyst & Chief Trader for Anduril Analytics. He is also a contributor to Trading Markets.

[ Comment, Edit or Article Submission ]