That is the question that differentiates one from the other.
A lot of us, including me before, have this problem in regards to the stock market. We are afraid of the stock market because we see all the risk in it. As they say one can be rich in the blink of an eye at the same time one can be poor in the blink of an eye. Well that could happen if you don't know what you are dealing with.
Many people joined the stock market bandwagon thinking of quick rich fix. In reality it takes time to get rich in the stock market. I heard an interview of the CEO of one of the stockbroker company in the Philippines and he noted that 80% of all the people who joined the stock market lost their money. The thing is many people jump into buying shares of a company because they heard from their neighbor, friend, or overheard from someone in the SM food court that this so and so stock's trend is upward and if they buy today they will earn a lot.
One has to categorize either you are an investor, trader or both.
Investors are for the long term. Buying stocks to be held for a long term means one is interested in the performance of such company. You become part owner of that company and because of such you are entitled to the profits of such company. Companies share earnings to their owners by paying out dividends. It is a fix amount of money per share given as a result of the company’s good performance. An investor looks into the company’s profitability in the next 5 - 10 years. Great companies that have withstood the test of times and have a proven track record of good performance are good to start with.
Traders on the other hand are risk takers. These are the people who speculate on the stock market's day to day demand-supply cycle. Very few people have truly mastered this technique. These are what we call the professional in the field of stock trading. One thing that these people must have is information. Having the right information can give one an edge on the stock trading game. They study the trend of the stock market. They study the MACD, Stochastic, and the various charts. They must also be up-to-date about the general local and global economy because these are one of the factors that affect the market's demand and supply. Also, like the investor, they must have a good picture of the company’s financial picture thus they have to learn the various financial ratios that I learned back in my college years like P/E ratio, Dividend Yield ratio, etc. It is rewarding if you got the right timing thus one must be fully knowledgeable about these things.
Or are you both? One of the great lessons we learned with this financial downturn is not to put your eggs in one basket. You are missing the chances of earning big if one places his money everything in investment for long term and on the other hand putting them all for risk taking that might make you ending up broke. That is why the term diversification was there. It simple means as we have said "not putting your eggs in one basket."
In my other post I have mentioned that one must determined first how much one can invest. A good advice is to invest only your extra money. After segregating for your daily expenses, payments for bills, emergency money, and savings for something you want to buy then whatever is left that is the amount that you can truly invest. And besides from investing in the stock market one can also invest for cash flow or in other terms business (this one needs another post). By diversification we also mean putting your money in different vehicles. If you put your money in stock, bonds, and EFT you are still putting it in one basket that is in the stock market. Putting it in savings account, UITF, and time deposit is also putting in one basket and that is banks. Diversification means placing it in unrelated vehicles.
With all these thoughts and ideas I believe you will ask me why then you tell me to invest when it is risky and it is hard to understand? Well most people's error is that they wanted a quick rich scheme and that they think investing is such a tasky thing. But I guess in order to get what one wants one must work hard for it. It has been old saying easy money, easily goes away because we never value it due to the fact that we never work hard for it. It is only when we worked hard for it that we value it and we get wiser in making it grow more. And as we learn more about it we tend to appreciate it and in the end benefit from it by having the life that we have always been dreaming of.
