Many people think that trading and investing are one and the same. But there is a significant difference between the two. While both are means of participating in the stock markets, the key distinction between a trader and an investor is the length of time in which they plan on holding their stocks.
Snatching up shares of speculative stocks and trading them actively can seem like an exciting way to make a quick buck. However, the reality is that very few people succeed at this game of stock picking. Many traders may think they can make money, but it is long-term investors who are often the ones who actually make money.
Investing is a way of building wealth by buying and holding a diversified portfolio of securities for a long period of time. As passive investing becomes mainstream, many investors also take a buy-and-hold approach with exchange traded funds (ETFs). For instance, a stock ETF provides exposure to a broad range of stocks via a single investment, and saves an investor the time and money of purchasing multiple individual stocks.
Investors benefit from the performance of their stock holdings through capital appreciation and / or dividends. The day-to-day fluctuations of various stock prices are generally less important than the overall growth potential of their portfolio over an extended period of time.
Trading involves the frequent buying and selling of stocks. Traders usually analyse market movements using technical indicators such as candlestick charts or moving averages to time the market.
They hold their stocks for brief periods of time, sometimes even as short as a few minutes, to benefit from price movements. Traders try to take advantage of price fluctuations to make quick profits, but this also comes with daily monitoring and a significant amount of speculation.
Why most traders lose money
On the surface, trading looks easy. Watch price movements, jump in and out of trades, make a little profit, and repeat the process again. But what many people don’t realize is that successful trading takes a good deal of time and practice to learn. Reading a few books or even taking an expensive seminar on trading will not make you a competent trader. In fact, the evidence suggests that 90% of traders lose money.
The few traders who do succeed have spent years practicing, honing their trading strategies, mastering their emotions, and learning how to be disciplined with their trading plans.
In contrast, many traders allow fear or greed to drive their decisions. They may end up exiting profitable trades too early, panic selling when the markets fall, or chasing the market to recoup their losses. These traders may make a small profit from time to time, but in the long run, they almost always end up losing money.
Novice traders may be playing with fire
A lot of people start trading because they heard about some “hot stock tip”. They get lucky and may subsequently go on forums or blogs in search of the next Netflix or Amazon. They then make the trade based on their “gut feeling” that a particular stock will go up.
Such emotional trading – without any consideration for fundamentals – is why thousands of retail traders have piled into Hertz, the bankrupt rental car company. Many of them bought into Hertz after its share price plummeted following its bankruptcy filing on 22 May. Between 26 May and 8 June, the share price inexplicably skyrocketed from 56 cents to $5.53, gaining nearly 900%.
Chasing trends in hopes of making a quick buck can have disastrous consequences. Today, the share price of Hertz has fallen to $1.49 at this time of writing. Experienced traders would have made money from the initial buying frenzy, but many retail traders who jumped on the bandwagon and bought at the peak lost money.
Transaction costs can erode any profits
In Singapore, trading stocks cost money. Each time you buy or sell a stock, you pay your broker a brokerage fee, which can range from $10 to $25. These costs add up very quickly and eat into your returns, more so if you are trading in and out of stocks regularly.
Investing is the way to go
Rather than short-term trading, long-term investing is the better and less risky option.
If you want to pick stocks, do your due diligence and invest in high-quality, well-established companies. Hold these for the long-term and there is a high chance you will benefit as these companies continue to prosper over time.
But bear in mind that even professional active managers don’t do it well all the time. Active managers rarely beat their benchmarks consistently. 88% of actively managed funds that topped their benchmarks in 2018 failed to repeat their outperformance in 2019.
The better thing to do is follow Warren Buffet’s advice and invest in low-cost index funds.
Over long periods, a broad market index fund like the SPDR S&P 500 ETF tends to go up despite short-term volatility. There is no need to worry about picking the right stocks to benefit from the market’s overall growth.
An easier way of investing in top global stocks
For an investor seeking maximum exposure to equities, stock ETFs are the ideal choice. However, buying multiple ETFs can quickly rack up brokerage and transaction costs as well.
A more cost-efficient option would be a 100% equity portfolio like Syfe’s Core Equity100 portfolio. It invests in over 1,500 stocks from the world’s top companies such as Microsoft, Amazon, Apple and more. With a smart beta strategy that tilts the portfolio towards large-cap, growth and low-volatility factors, Core Equity100 provides higher risk-adjusted returns over the long-term.
If we’ve convinced you to stop trading and start investing, explore how the Core Equity100 portfolio can fit your investment goals here.