Trade Or Invest?
Is it better to trade or invest in stocks? What is the difference between investing and trading?
Trading and investing are entirely different ballgames. Both have the same aim, to grow your wealth, but they have various time commitments, risk profiles, and likely outcomes. In this article, we explain the main differences between trading and investing, and hopefully, this explains what would be the best approach for you: trading or investing – what is best?
At the end of the day, you might find out that trading is not for you. That is fine.
Both trading and investing aim for good risk-adjusted long-term returns. However, trading involves doing many trades to generate small returns per trade but done many times, while investing is about letting your capital compound by doing very few trades. Even if you are a below-average long-term investor, you end up wealthy by saving and compounding (if history repeats itself).
Why would you trade? Here are some arguments:
- Trading is more scalable than investing
- If you are good, trading can offer “stable” returns – in both bear and bull markets
- Because it’s scalable, trading might offer a faster path to wealth (assuming you are good)
Skills required for success in trading
Trading is a zero-sum game. On any random trade, the expected return is pretty close to zero. To win you need to develop trading edges (as you learned in one of the previous lessons) that let you either win more often than lose or make bigger profits on winning trades than losing trades.
Below are a few factors you need to consider before you start trading:
- You need a passion for trading
- You need many strategies in different markets and time frames
- You need to overcome behavioral biases
- You need to learn how to program/code
- You need discipline and good work ethics
- You are forced to pay taxes on annual profits
- Trading is stressful
- Trading requires constant work, which, of course, has an opportunity cost
- You’ll most likely have long periods with no or negative returns
- You need a Plan B at all times
Jeff Bezos once said that if you double your number of experiments, you double your inventiveness. What does this mean for a trader? You always need to test ideas and hypotheses and never be afraid of testing “stupid” ideas. Nothing lasts forever, and indeed not trading strategies.
What about investing?
Investing doesn’t require so many skills, except for saving regularly, which of course is not as easy as it sounds. Most retail investors underperform because they buy tops and sell bottoms, and don’t have any diversification.
To “succeed”, all you need is to dollar cost into broad mutual funds: