Understanding trading and investing
Online Stock trading is the regular selling and buying of stock, currency and commodities with the aim of spawning profits. While a stock investor may be satisfied by annual returns in the range of 10-15% a stock trader is keen earning a certain percentage on a monthly basis. A trader buys stock when the prices go down and sells them immediately the prices go up, usually within very short periods of time. In falling markets, traders sell at higher prices and to cover they buy at low prices. Traders make their losses or profits in very short durations as compared to investors who take a long period before they offload their stock. Traders may at times sale their stock at predetermined prices in order to avoid making further losses; this is done as a preventive mechanism. Stock traders take high probability trading steps that are reached through stochastic oscillators and moving averages.
Stock traders are categorized based on the duration between when they purchase and sale their trading instruments. Below are categories of stock traders:
- Position traders hold trading instruments from a few months to several years.
- Swing traders hold their instruments in time frames that range between a day and several weeks.
- Day traders hold instruments just as the name suggests during the day and will sell off before the night.
- Scalp traders do not hold overnight positions and only have stock for a few seconds or minutes and dispose them off.
The above trading styles are taken up by traders depending on several factors that are not limited to: time the trader has set aside for trading, risk tolerance, trading experience, account size and personality.
Investors on the contrary consistent accumulate profits over long periods of time by purchasing then holding on to bonds, mutual funds, stock portfolios, stock baskets or several other instruments. Stock investors gain profits through reinvesting previously earned dividends and profits by adding more stock to their stock share or compounding. A stock investor may hold a stock for several years with some even for a decade or more; during this time the investor watches out for bonuses such as stock splits, dividends and interests. Stock investors are motivated by the fact that despite the market fluctuations they will be able to recover from their losses when the prices rebound and they are always anxious market essentials especially price.
At the end of the day the trader and investor both earn profits; traders take advantage of the fluctuating stock prices to buy and sell thereby earning small but regular profits, on the other hand investors buy but hold stock for longer periods with the aim of making large profit margins.
Choosing between trading and Investing
Fist you need to determine how much time you are willing to devote to going through charts, reading charts and going through company basics. For people who are can only spend marginal time to conduct a background check on a company it is advisable that you consider long term investments.
If you have all the time to go through financial statements, conducting background checks, going through projections and growth charts as well as being ready to play the market then you may consider trading but it is not going to be a walk in the park. For investing you have to do thorough research and be certain that the companies you want to put your money in are stable. It is advisable that you check the companies foundation especially; financial background, consistent growth and profit by extending to several years that have passed.You also need to find out about the organizations leadership structure and how it is performing against its competitors in the industry as well as well as identifying projects that they are planning to undertake which you think will make the organization perform well in future.
Whether you choose on trading or investing one thing is for sure; you will have to put in some man hours and energy.
Common mistakes investors make
They do not plan: There is saying that states “failing to plan is planning to fail” and this applies to stock investing as well. It is advisable that every individual who wishes to go into stock investing should have an investment policy that is aimed at addressing their goals and objective, appropriate benchmarks, diversification and asset allocation.
Short time horizons: You should evaluate your time horizons and if you have dependents whom you will be leaving as heirs then your investment time horizon should be long. It is common that everyone will focus on the short term but it is advisable that you set your horizons based on what purpose the earned profits will serve.
Paying attention to financial news: Many people are misled to believe that financial news can help them in decision making in regard to their investment which is not always the case.
Avoiding re-balancing: This requires that you sale off asset classes that are well performing then buying those classes that are not and holding them to the point that they earn profit. This to most investors is not an easy decision but is highly profitable in the long run.
By recognizing and avoiding the above mistakes that most investors make you will be highly advantaged in meeting your goals and objectives. The by avoiding the above you will be taking solutions that are not exciting but you are sure of greater profits which is what you are looking to achieve with your investment.
Common mistakes traders make
Not learning. Most people would go into trading without learning and end up making losses. Just as you would go to college for a degree to get a job so should you learn the various trading strategies before you can start trading. At least learn a single technique and use it as you learn others.
Over trading. This is a mistake common to every trader who is looking to make quick money. One thing most people do not understand is that they make more trading mistakes whenever they are under pressure.
Not taking a stop loss. The trade will not always be in your favor and it is advised that whenever the stocks are going against you it is best that you sell of your stock at the next predetermined price. This together with money management will be profitable to the trader in the long run.
Trading with divided attention. Trading is very demanding and should be allocated quality time and your full attention during that time. It is common that the prices will stagnate at a single point over a long duration and either rise or go down at high speeds which may lead to your target or loss thus you need to be very watchful.
Trading when having negative emotions. A bad mood can negatively affect your trade thus it is advisable that you do not trade when you are emotionally down or sick and this does not mean that you do not pay attention when elated; you may overlook some things. It is best that you embrace mechanical trading and keep your sensations away from the trading ring.
The more you trade you will be able to gain more experience thus learning ways that you can employ to avoid the above mistakes.
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