Investing, trading and speculating differ. There are many ways to make money in the stock market. All versions of investing, trading or speculating. All take different approaches to making money. Each approach needs a different amount of time, has different risks and produces different results.
How do investing, trading and speculating differ?
Money Choices That Grow Wealth course 250, lesson 10, answers the question, how do investing, trading and speculating differ? At the end of the lesson, links to related content help you learn more.
What you learn:
Methods differ as do time, risk and results
This lesson has four parts.
Part 1:
Differences in investing, trading and speculating.
This section defines each approach to making money in the stock market.
Part 2:
Time to manage and time to hold each strategy
Know the time needed to manage and holding times for each strategy.
Discussion of time needed to manage each approach as well as the time needed to hold a position to see results.
Part 3: Before you act know your risk from low to extreme.
Each strategy used has different offers a different level of risk. Using the stock market to build wealth means understanding and managing those risks.
Part 4:Â Returns from none to very high directly tie to production power.
Returns vary by the strategy and time used. Delivering the best wealth building results happens by following a stock market success plan.
What makes each basic approach different?
Our lesson begins with a discussion of what makes each approach unique.
Part 1: Know the differences between investing, trading and speculating:
Investing
Investors buy shares in companies seeking income. To be considered investment grade the companies must pay dividends. Investors collect those dividends and consider any equity growth to be a very nice bonus. Superior investors buy shares in profitable or growing companies and never consider buying any others.
Owning shares in those stable and dependable profit producing companies lets investors build a reliable and secure income producing portfolio. By restricting their purchases to high quality income paying companies, investors take a low to moderate risk approach to the stock market.
Such an income building approach forms a solid conservative investing base that produces steady and dependable returns.
The financial industry pays lip service to this investing approach. All the while the industry and media coverage encourages trading as the way to stock market success. Well managed investment accounts pay the smallest fees to advisers or managers. In contrast traders pay several times as much.
TradingÂ
Rising share prices attract trader buying. Traders buy when they expect prices to rise higher yet. Traders seek to profit by buying low, or at least lower and selling high or at least somewhat higher prices. They profit from the rise in share prices, not from growing revenue or bottom line profit. When it works, a good trading strategy can produce excellent returns for traders.
That share price movement has trade-offs. Traders accept more risk and price volatility than investors. On the positive side they ride trading stocks to higher returns from that equity growth. Most often that price growth produces more profits than the income approach. Those gains happen faster than any reasonable dividend stream could ever produce.
Compared to income investing, trading produces more profit, sooner. But those profits come at higher risk and with the need to sell to bring those profits home. Traders who do it well, spend far more time managing their portfolios than an investor has to.
Profitable and even exciting, traders are the darlings of the financial industry. The regular buying and selling produces great revenue for advisors and the industry. Advisers and the financial companies take their cut if trades are profitable or not.
To do it well, trading takes much more time than investing. Trading strategies range from moderate to very high risk. Holding periods range from nanoseconds to months. To realize profit, traders must sell. They sell their profitable positions and seek their next trading opportunity. The buying, selling and research employs many people and takes time.
Speculating
Speculators have dreams or perhaps wishes of realizing the potential of huge price gains. Speculators seek to profit from spectacular share price gains. This is the high risk – high reward crowd. Speculations are the highest risk of the basic stock market approaches.
There is no such thing as low risk speculating. In fact, most speculations accept high to extreme risk. Speculators shoot for the moon, seek home runs, swing for the fences and let it all hang out,! This approach can produce spectacular upsides.
But speculating can also produce no returns or real and at times total loss of capital. When done well, speculation can work well. To make that happen speculation requires much knowledge. It also means paying very close attention and spending lots of time. Speculation is a very high risk strategy. As with trading, speculators sell to realize profits.
A few financial advisers specialize in speculating. Be aware that very few do it well for clients over a period of years. Every transaction attracts adviser commissions. Advisers collect when clients win or lose. The client takes all the risk. Clients eat any losses and still pay advisers when selling losing positions.
Part 2: Know your time to manage and holding times to best realize an opportunity!
There is time to manage and time to hold. How much time does is take to manage using each approach and how long do you hold onto each position when you invest, trade or speculate? Managing time varies from minutes a week to virtually full time concentration during market hours. Holding times for people using each approach varies between nanoseconds to many years.
As for use of time. the time to manage each approach differs and the production pulling power of each approach depends on time in each position. We look at the time periods for our three basic approaches:
Investing holding time
Managing this approach requires minimal time.
As for time in an investment, investors hold these quality positions for years. All the while they continue to collect those nice dividend payments! So dependable, so boring and an excellent way to build wealth! And that is the base of the White Top Investor approach to portfolio management.
Investors hold for at a least 1 – 3 years. The ideal is to own the best dividend paying companies for many years. There is little need to buy and sell very often so this approach has very few transactions. As a result, transaction costs are low. Low transaction costs keep more money in the pockets of investors. A portfolio of dividend paying winners is a beautiful and productive financial creation.
Trading holding time
Traders buy and sell positions in seconds, days, weeks or months. Few traders hold for over a year. Other than short-term or day-trading traders most often hold positions for a few weeks or many months. Traders buy positions anticipating a rising stock price.
Often they wait until a stock price actually begins moving up before buying. Traders taking that approach most often sell when the upward price movement stops.
Portfolios of traders usually have some spectacular winners and more moderate gainers. But traders also have duds the do not move up or move the wrong way. Better traders correct mistakes early. They sell losing positions as fast as possible. That stops any growing losses.
The trading approach produces many trades and their related costs. Advisers love these guys! They pay so well and so often! This approach has the highest costs.
Speculating holding time
Most speculators hold for weeks or months. Taking this higher risk approach to making money can mean holding positions for very long or for very short periods.
When they happen, winners are the stock market shooting stars! The best of this lot move decimal points! On the downside, losers sink ships and take all the capital to the bottom.
Speculation results vary over the widest possible range. Knowledgeable speculation, done well in the right circumstances, produces stunning returns. On average, most speculations produce tears. This approach has the potential for the highest losses. Far too often bad execution puts speculations in the financial graveyard.
Part 3: Risks range from low to extreme
Risk means knowing your possible downside. It is the level of uncertainty or likelihood of loss. Don’t fall for the high risk, high reward tale. Higher risk does not necessarily mean higher return. There is a considerable amount of nonsense written by the financial industry, financial media and shamefully academia that does a great job of saying risk relates directly to reward. This misleading work conveniently overlooks downside assessment and management, the real key to risk control.
There are ways to bring home excellent returns without taking high risks. There are also many high risk situations that offer little or no chance of producing any return and more likely will lose your money. Know how to judge risk by first asking, what is the downside, how much could I lose?
If the value of your position could go to a value of zero, “0” because it is possible no buyer including the house will bid for your shares, your risk is 100%! You could lose it all! That is an extremely high risk situation!
That is a very high risk situation. you can lose This is a good place to define risk.
Investing risks are low to moderateÂ
Investor’s strategies range from ultra-risk avoiding to moderate risk acceptance.
Trading risks are low to high
Trading risks have a very wide range of risks depending on any specific trading decision.
Speculating risks are high to extreme gambles
This approach has risks approaching that of lottery tickets.
Part 4: Returns vary over a huge range directly tied to the production time of a position
Investing returns
Trading returns
Speculating returns
Investing trading and speculating variations differ even more!
These three generalized strategies all come in many variations and refinements. White Top Investor lessons focus on first understanding these basics. For wealth building, White Top Investor recommends building portfolios around income investing.
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Money Choices Grow Wealth,
lesson links:
Introduction to Money Choices That Grow Wealth Lesson 1
3 Stock market approaches Lesson 2
Income, value and growth investing Lesson 3
3 Distinct investing approaches Lesson 4
Aggressive trading chases profit Lesson 5
Momentum investing trading play Lesson 6
Speculation returns for big risks! Lesson 7
Risks complicate spectacular returns Lesson 8
Speculation failures improve investing Lesson 9
Middle trader thinking differs Lesson 10
Investing trading and speculating differ Lesson 11
Buying ETFs accelerates returns Lesson 12
Next lesson 12:
Buying ETFs accelerates returns
Have a prosperous investor day!
Bryan
White Top Investor
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