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Any bonus went right out the window on a new car or other purchase.
One day, I received a wake-up call.
We had just purchased a new home. Money was tight. Tighter than it should have been.
And I couldn’t pay the mortgage without dipping into my little girl’s college fund.
It’s not as if I went broke. But borrowing from my daughter’s future changed something in my wife and me.
We began to track our spending and save for the future.
And after poring over books, podcasts, newsletters, and anything related to finance I could get my hands on each day, I came to the conclusion that real wealth can be built through two strategies: investing and trading.
But too often people use these terms interchangeably and act as if they are the same thing; they are very different animals.
Some folks are too impatient and turn to trading, making risky moves in hope of a big score in a short amount of time. Other people are too risk averse, and they completely stay away from the trading side of things.
But when used in a strategic combination, you can get the best of both worlds.
You can own companies that will provide you with long-term wealth while also making short-term trades that add more money to your bank account in the near term.
That’s why I want to take the time today to explain the differences between investing and trading.
While there aren’t hard-and-fast rules, the guidelines I’m about to share will help you know when to use each of them.
Investing and TradingWhen Warren Buffett buys a stock, he sees it as a stake of ownership in a company. The Oracle of Omaha has owned shares of Coca-Cola Co. (KO) for decades.
Investing in a company requires you to believe in its future and its profitability. These aren’t positions a person holds for months or even a year, but often multiple years, if not decades.
Additionally, investments will often build on a thesis or theme.
For example, buying Google back in the early 2000s was a bet on the company and the growth of the internet.
In comparison, trades can last seconds, minutes, hours, days, weeks, or even months.
However, they rarely last for years.
I look at trading as more transactional and driven by catalysts. These catalysts can arise from technical features, such as entry signals from our TradeSmith Finance platform, or news events, such as earnings.
Trades are more defined, with a specific start and end.
Day traders will often identify a specific price target and stop loss before they enter a position.
When an Investment Becomes a TradeWhen investing in a company, I own shares until something materially changes with the company itself or the long-term industry outlook.
Exxon Mobil Corp. (XOM) is a great example of a long-term outlook changing.
The energy behemoth was one of the largest companies in the world by market capitalization for decades.
As nations developed and populations grew, energy consumption increased.
It made perfect sense to own Exxon Mobil… until 2014.
That’s when fracking technology took off, realigning global energy markets.
At the same time, a broader push for non-fossil-fuel sources began to blossom.
When I looked into Exxon Mobil’s future back in 2009, during the depths of the Great Recession, I still saw a vibrant outlook.
Now, I can imagine a future without the company.
Exxon Mobil is no longer a long-term investment based on a belief in global energy driven by fossil fuel consumption.
It’s a trade based on a multi-year outlook and an assessment of geopolitics.
Trading Around an InvestmentMy friend and Senior Analyst Mike Burnick is what I like to refer to as a strategy options investor.
Mike uses a set of criteria to narrow his focus to companies that meet his parameters, then actively holds positions in those companies while using options to augment his gains.
This is what’s known as trading around a core position.
Most investors do this with a specific company that they’ve owned for years. Mike does it with a basket of stocks selected by his screeners.
I know a lot of investors shy away from trading because they simply don’t want to learn how to do it.
Unfortunately, they miss out on some great ways to beef up their total returns.
For example, I strategically sell covered calls against core holdings to create an additional income stream on top of any capital gains or dividends.
Similarly, I can use other strategies to participate in the rise of a company’s share price over multiple years with less capital down than if I bought shares outright.
That’s why I feel that our platform is so powerful.
We offer a combination of investment and trade insights that anyone can combine for truly powerful results.