Investing vs trading

Before you start throwing your hard-earned dollars at a random publicly traded company, you need to identify what your investing goals are. Do you want the potential for huge returns and can accept a high risk? Do you want lower consistent returns over the long term? Do you want a consistent passive income? Most likely, you will want a combination of these strategies but that will be for you to determine with your situation and research.

There are various factors you should consider when determining your investment goals. The length of time you will be contributing to your investment account, when you plan to withdraw funds, your appetite for risk, taxes, and how active you want to be in your portfolio.

Any mentions of companies are for example only and should not be taken as investment advice.

Many people confuse the term investing for trading. Trading stocks focuses on short-term speculation whereas investing focuses on the long-term potential of a company. The goal of investing is to build wealth over time by buying and holding companies you believe in for years or decades. Holding a stock for more than a year has the added benefit being filed as long term capital gains on taxes which have a much lower rate than short term gains.

As an investor, your mindset is that of an owner in a company that you get to pick. The research phase in an investment strategy is the most important aspect. Effectively evaluating a company's fundamentals, in the beginning, can set you up for success in the long run. The goal of fundamental analysis is to find a company that is undervalued by the market and holds the potential to increase in the future. A company might be undervalued due to many factors. A bad earnings report might cause a stock price to drop, the company might be a new up and coming brand or the entire industry the company is in could be unknown to the broader market. Evaluating the fundamentals of a company will be split into two main groups: quantitative (objective numbers) and qualitative (more subjective quality or nature).

Quantitative analysis will require digging into a companies balance sheet and future projections. This will take some time to learn what all of the numbers mean and which ones you care about but is not a huge undertaking. Some of the more important figures your might want to include in your research are price to earnings ratio (P/E), earnings per share (EPS), market capitalization (company's net worth), shares outstanding, profit, debt, and cash on hand. Take a look at Apple as a reference point while we go over these numbers. Price to earnings is a great initial indicator to determine if a company is undervalued. A lower number is better (15 is pretty amazing, 20 is good, 30+ and the company might be overvalued). However, this indicator is more accurate for more established companies. A newer company focused on growth will be spending its earnings on research and development which will make the price to earnings pretty high. For more speculative growth companies, earnings per share growth will be an important number to take into consideration. Cash, debt, and profit can give a snapshot of how well the company is managing its money. If you have a lot of cash in your bank account, very little debt, and a positive income you are in a low-risk financial state. The same applies to these companies. Again, a high debt could mean that the company is focused on growth so take everything into consideration in your research.

Qualitative analysis is more of an art than the objective quantitative analysis part of your research. This will focus on the industry, products, and company culture. Look around you, what brands do you see most often? These are brands that you already see value in and there is a good chance other people are buying that company's products as well. You needed a certain type of product and specifically picked that brand's product. You or someone you know might swear by Ulta's beauty products, for example. A company might have a product that is so far ahead of the competition that they are in a league of their own. Many consider Tesla to have a product "moat" due to their experience and data around self-driving cars that makes it hard for other companies to catch up. Another aspect of a company to consider is the culture, specifically the CEO. Is the CEO the founder? Does the CEO have a solid vision for the future of the company? Are the employees engaged in the company's success? All of these quantitative factors could be indicators that set the company apart from the competition.

Worried you will buy the stock only to watch its price tank over the next month? Dollar-cost averaging is a great way to avoid this happening when investing. If you believe in the company and expect to hold for years to come, drops in price can be seen as the stock "going on sale". Instead of buying the full amount in one transaction, split your buy orders up over time to take advantage of any dips that might occur.

The flip side of investing is trading where momentum and technical analysis are the core of the strategy. Swing trading aims to identify certain price action on a stock's chart and take advantage of the pattern and speculating where the price will be in the next few days or weeks. Because the timeline is much smaller for swing trading, the risk will be higher than investing but holds the potential for greater returns. Risk management becomes more important in the shorter time frame trading strategies. Smaller position sizes, profit price targets, and stop-loss exit prices should be considered and followed before entering a trade to manage risk. You will also need to take liquidity into consideration. Liquidity is a fancy way of saying how many shares of the company (or volume) are being traded on a day-to-day basis. Low liquidity means it will be harder for your orders to go through which might result in you buying at a higher price or selling at a lower price when your order does get executed. Do not blindly follow advice from someone on the internet when trading! Do your research, learn price action, risk management, and a strategy that works for you! Follow ClinkUp for future articles and resources around swing trading strategies and chart patterns.

Unlike investing, many of the companies traders focus on might not have any long-term value but simply hyped up from an influencer on social media. This is commonly known as a "pump and dump" where an individual or group purchases shares in a low-value company that does not trade much daily volume. They proceed to "pump" the stock by sending out emails, posting on social media, etc. which causes the trading volume to spike and the price to skyrocket. They will be dumping their shares to the people caught up in the FOMO frenzy and those that believed the hype will be stuck with a worthless company as the price plummets. Unless you are experienced in swing trading, you will likely lose money. So be very careful before handing over your money to someone else and avoid borrowing money (margin) for these speculative plays. Trading on margin is a quick way for a beginner to lose their investment and even own their broker money if/when a trade goes against them.

Was swing trading not risky enough for you? Day trading is considered by many to be gambling. Much like swing trading, day traders focus on chart patterns and momentum to speculate on the future price of a stock, however, the buy and sell transactions happen on the same day. Because of the high risk, the pattern day trader rule applies to broker accounts under $25,000 which limits your account to no more than three day trades over a 5 weekday period. This can be dangerous if you have an open day trade after going over the limit since you will not be able to sell until the next day.

A small time frame opens the possibilities for even more strategies. When day trading algorithmic traders (computer programs that do the trading) are your main competition. Many algorithmic strategies are based around scalping that buy and sell stock in very quick succession for pennies per share to take advantage of momentum over minutes or even seconds. Emotion is a trader's worst enemy. If your heart is racing when you initiate a trade, you probably should not be in that trade. This is why algorithmic traders will take your money nine times out of ten. That is not to say day trading should be avoided entirely. Some people are very skilled at this type of trading. It takes lots of research, practice, and skill. All of which a beginner does not have. See if your broker has paper trading available to test your strategies without risking any real money!