The Difference Between Trading and Investing #finance #stocks
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00:00Hey there! If you watched my video on how the stock market works, you know I promised to explain
00:05more about investing and trading. So if you haven't watched that video, I recommend you
00:10watch it first. As I said in that video, you can buy stocks for trading or investing. But,
00:17what's the difference? Both trading and investing involve the same action of making money from
00:22investment. The differences lie in the time period and the way to analyze the stocks.
00:27So, how do these two things differ from each other? Well, let's understand more about both
00:33of them. The first way, trading. As the word trading means buying or selling goods, then
00:40trading in stocks is the same. In the stock market, trading means buying stocks at a lower
00:45price and selling them at a higher price in a short period frequently. To trade effectively,
00:51you need to understand something called technical analysis. But what is technical analysis?
00:57I believe you have seen stock graphs many times, right? This is called a candlestick chart,
01:03and each candlestick represents the price movement of a stock. Basically, when the candle is green,
01:09it means the stock price is going up because more people are buying the stock than selling it.
01:14When the candle is red, the stock price is going down because more people are selling the stock
01:20than buying it. Candlestick charts are actually more complex than that, but in this video,
01:25I will keep it simple. Traders analyze these graphs to predict when and where the stock will fall
01:31and when and where it will rise again. Technical analysis involves studying past price movements
01:38and patterns to forecast future price behavior based on the belief that historical patterns tend
01:44to repeat themselves. Let's get into an example. Let's say you want to buy a stock and you see this graph.
01:51The golden rule of trading is to buy at a low price and sell at a higher price to make money.
01:57Using your technical analysis, you predict that at a certain point, the stock will stop falling and
02:03start rising again. Most traders wait until the graph shows signs of growth before buying.
02:09For instance, you buy one share at $10, then you wait for the stock to grow, and let's say it reaches
02:16$13. You analyze the graph again and see signs that the stock will fall, so you sell your share
02:22for $13. Congratulations, you just made a $3 profit. As your prediction was correct, the stock falls to
02:30$11. You see signs again that the stock will rise, so you buy it at $11. The stock grows to $16,
02:37and you sell your share again, making a $5 profit. So, you might think trading seems like easy money,
02:45right? Well, the example I just told you is like every trader's dream because in reality,
02:50it's not that good. In reality, technical analysis is not 100% accurate. You're predicting when the
02:58stock falls and when it grows again. If your prediction is wrong, you lose money. In most cases,
03:05you might buy at $10, expecting it to rise, but instead, it keeps falling. To minimize losses,
03:13traders use a strategy called stop loss. Stop loss is when a trader sells the stock when the stock price
03:20has hit a certain price or percentage before it falls further. For example, if you have $10 to trade,
03:26you can only tolerate losing $2. You set a stop loss at $8. So, when your stock value drops to $8,
03:35you immediately sell the stock before it falls further. After doing a stop loss, the stock might
03:41fall a bit more and then rise again slightly. You may see this as a sign of recovery. So, you buy
03:47again at $9, expecting it to rise. However, if the stock falls again rapidly and you have to stop loss
03:54again, you end up losing more. In this scenario, you lost $2 initially and another $3, totaling a $5 loss.
04:03And the another scenario is you buy the stock at $10 and the stock starts to rise. At $13,
04:10you see signs that the stock might fall, so you sell to lock in your profit. The stock falls a bit as
04:16predicted, but then it rapidly grows to $17. You've missed out on a much larger profit because you
04:23sold too early. So, while you made a $3 profit, you missed out on a potential $7 profit. So, trading
04:31involves a lot of risk and requires constant monitoring and quick decision-making. And there
04:37are also different types of trading, including day trading, which involves buying and selling stocks
04:43within the same day to profit from small price movements. Then, swing trading, which involves
04:49holding stocks for several days or weeks to profit from expected price changes. And position trading,
04:56which is a longer-term strategy where traders hold stocks for months, aiming to benefit from longer-term
05:01trends. You can trade in various markets like stocks. Forex trading, which involves buying and
05:08selling currencies. Commodity trading includes gold, silver, oil, and agricultural products,
05:15and also cryptocurrency trading, like Bitcoin, Ethereum, these meme coins, and others.
05:21And let's continue to the second way, investing. While trading focuses on short-term gains,
05:28investing is about building wealth over a longer period. As the word investing means buying assets that
05:35will grow in value and will generate income for you over time. If you've watched my video about how
05:42the stock market works where I explained the Sarah's Pizzeria case, that's also investing. In stock market,
05:48investing means buying stocks and holding them for an extended period, often years or even decades.
05:55Investors look for companies with strong fundamentals, believing that their value will increase over time.
06:01Additionally, some companies pay dividends, which means they distribute a portion of their profits to
06:07their investors regularly. Unlike trading, investing doesn't rely heavily on technical analysis, but
06:14focuses more on fundamental analysis. And what is fundamental analysis? Fundamental analysis evaluates a
06:22company's financial health and performance. This includes analyzing financial statements, such as the balance
06:29sheet, income statement, and cash flow statement. Investors look at metrics like revenue, profit margins,
06:37earnings per share or EPS, return on equity or ROE, and other metrics. By doing this, investors will know
06:46whether the company is growing, profitable, and worth investing in. Because no one wants to invest in a
06:52failing company. So, let's get into an example of investing. Let's say you want to start buying stock to
06:59invest. And you find a company named WeWe Shoes Corporation. You've done your research and believe
07:05WeWe Shoes Corporation has strong growth potential because they make high-quality stylish shoes that
07:11have become increasingly popular. So, you decide to buy 10 shares of WeWe Shoes Corporation at $50 per share,
07:19totaling $500. Over time, WeWe Shoes Corporation launches new shoe designs that go viral and captures the
07:27interest of the interest of many people. The company expands by opening new stores and boosting online
07:32sales, leading to increased revenue and profits. The company also pays a dividend of $2 per share
07:39annually. With your 10 shares, you receive $20 each year in dividends. The company's stock graph
07:46goes up and down. But overall, the trend is still going up. And you still believe in the company as it
07:52continues to do well, as WeWe Shoes Corporation never stops innovating new styles of shoes,
07:58and everybody still loves it. After holding the shares for five years, the stock price rises to $150
08:06per share, and you decide to sell them. Now, your initial investment of $500 has grown to $1,500,
08:14giving you a profit of $1,000. Additionally, over the five years, you've earned $20 in dividends per year,
08:22which means you got $100 in dividends, bringing your total earnings to $1,100.
08:28Now, you might think investing sounds simple and like easy money. If it were that easy,
08:34why doesn't everyone do it? The truth is, investing takes time and patience. Even the
08:40most successful investor, like Warren Buffett, took decades to build his wealth. He started investing
08:46when he was 11 years old, became a millionaire at age 32, and a billionaire at age 56. Quite a long
08:53time, huh? That's why not everyone is willing to do long-term investing. As Buffett said,
09:00nobody wants to get rich slowly. Also, investing isn't limited to stocks. Other common markets for
09:07investing include bonds, which are loans to companies or governments, which will pay you interest over
09:13time. Then, mutual funds are like a big basket of different stocks and bonds managed by professional
09:19investors. When you invest in a mutual fund, you're giving your money to these professionals,
09:24who will invest it for you. When they make a profit, they return some of that money to you,
09:30but they also take a fee for their services. Then, ETFs, or exchange-traded funds, work similarly to
09:38mutual funds, but you can buy and sell them on the stock exchange, just like individual stocks.
09:45Then, property investments that can generate rental income and appreciate over time.
09:50And cryptocurrencies, which are digital assets like Bitcoin, Ethereum, and these meme coins.
09:56So, in summary, both trading and investing involve buying stocks or other investment instruments,
10:02waiting for the price to grow, and then selling at a higher price.
10:07But the difference lies in the time period and the way to analyze.
10:11Trading is done in a much shorter time, maybe in hours, days, weeks, or months. Investing is done over
10:17a much longer time, like years, or even decades. For example, Warren Buffett has held Coca-Cola stocks
10:25since 1988, until this video is made, which is 2024. Then, trading focuses on technical analysis,
10:34which involves predicting price movements based on historical price patterns and trends.
10:39While, investing focuses on fundamental analysis, like looking at a company's financial health,
10:45market position, and overall potential for growth. In trading, you don't need to care whether the
10:51company is profitable or whether the business is good or not. Just focus on the price movement. While,
10:58in investing, you don't need to care whether the price is fluctuating up and down. Just focus on
11:03the company's performance that assures you it will grow well in the long term. Trading is more difficult,
11:10more stressful, and more risky. If your prediction is correct, you could get thousands of dollars
11:16overnight. But if your prediction is wrong, you could also lose everything overnight. While, investing is
11:23more relaxed and less risky. You can buy your stock today and leave it for one or two or even 10 years,
11:31without even checking on it, as long as you believe the company is still doing well.
11:36For example, if you bought 100 shares of Apple stock in 2008 for $300 when the price was about $3 per share
11:44and simply held it for 16 years, your investment would have grown to about $22,000 by 2024,
11:51when the price reached approximately about $220 per share. And some famous traders include Andrew
11:58Krieger, Paul Tudor Jones, Stanley Druckenmiller, and the controversial George Soros. In contrast,
12:06notable investors include the legendary Warren Buffett, Benjamin Graham, Peter Lynch, and Carl Icahn.
12:14And you might be wondering, which is better or more profitable? The answer is, it depends on various
12:20factors, including your financial goals, risk tolerance, and time commitment. If you want to
12:27make quick money and are okay with taking risks, trading could be a good choice for you. Trading
12:33usually means you need to watch the price movements all day to make the right decisions, so it often
12:38feels like a full-time job. But remember, it's important to really understand how the market works,
12:44and you have to be ready to accept losses when they happen. On the other hand, if you're looking for a
12:50more stable and less stressful way to grow your money, investing might be better for you. Investing
12:57allows you to put your money in and let it grow over time without needing to watch the market constantly.
13:03This approach is great if you have a busy schedule and can't keep checking prices. While it might take
13:09longer to see returns, the potential for steady growth can be rewarding in the long run. So, both
13:16investing and trading can be profitable, but both using different ways and risk tolerance. And before
13:22starting trading or investing, please make sure to learn as much as you can. Because if you don't have
13:28enough skills or knowledge about investing or trading, you will be a gambler who doesn't know what they're
13:33doing and will end up losing money. If you want me to make other videos explaining these topics,
13:39please like and subscribe.
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