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Investing in Stocks vs. Trading Stocks

When you hear about people making money from home on the stock market, it’s typical to think of someone yelling into a phone in their living room all day long as you see in movie depictions of Wall Street. However, the reality of learning how to make money on the stock market is much calmer, with patience and analysis being the two key skills for any at-home stock market beginner to learn and perfect. There’s also the possibility to shorten the learning curve of how to trade stocks, by taking courses such as those from StockOdds. You also need to know whether you are aiming to be an investor in stocks or someone who will trade in stocks, as the two practices are very different approaches.

Investing in stocks

Many people already have investments in the stock markets through their company retirement plans or college 529 plans as alternative ways to accrue money passively. The big idea when you’re learning how to invest in stocks is that you’re taking a super long view of the market: investment practices are often measured in years and decades and while there will be ups and downs along the way, investors are looking for the slow but steady accumulation of wealth through purchasing stocks that almost guaranteed to increase in value.

An example of this is the practice of value investing. By hunting out those stocks that have historically shown steady and predictable growth, but that are currently being undervalued by the market due to the daily news cycle or a recent poor quarter’s growth report, value investors can pick up stocks on the cheap that will almost certainly rise to their previous levels of performance and beyond. This requires you to have access to plenty of prior market data as well as an understanding of that particular field to know if the negative news is likely to be just a blip or an indicator of a downward trend in stock price.

Trading stocks

The flip side of investing in stocks is trading stocks. As the name suggests, stock traders buy and sell stocks (as opposed to investors who typically only buy), and the time scale for most traders is measured in hours and days. There are two ways to make money trading stocks: buying stocks at a lower price and selling them for a profit as the price rises and selling stocks at a higher price and waiting for the price to drop before buying them back again. Both of these can be done over the course of a single day, and you’ll hear stories of trading strategies where the time span for these trades is under a minute.

There are many different approaches to trading stocks and in any school of trading, you should find out as much as you can about the options that are available. Your preferred trading approach will depend on:

The amount of capital you have – by far and away, the amount of money that you have to trade with will dictate your strategy. Someone with a small starting capital should seek out a series of small, safe trades that generate a low amount of profit but that are guaranteed to increase your overall wealth.  If you have more money available, bigger and longer trades are possible as you can afford the loss and to have money tied up in the market awaiting the right moment to cash out.

The time you have available – for many people learning how to day trade (trading within the confines of the daily stock market hours), it starts out as a hobby where you’ll set a few trades in motion each day, and check in them periodically while you’re at your full-time job. However, the more time you’re able to put into your trading strategies, the more responsive you’ll be to small market fluctuations and you’ll be more able to turn multiple trades a day into a solid profit.

Your experience and toolkit – as noted before, having patience in the face of a poor decision or an unexpected twist in the market and being able to analyze the market data quickly and efficiently will help your overall success as a stock trader. These two skills can only be developed over time, and your level of experience with the stock market will dictate your decision making in different scenarios. You’ll also know the kinds of online tools that you can access that help you make decisions from candlestick charts to moving average points.

Your personal risk tolerance – finally, the reason why the market can become volatile and unpredictable is that it is the product of the interactions of thousands of individual personalities. Each trader has their own tolerance for risk that plays into at what point they will buy or sell their stocks in a certain company. As a beginner stock trader, you should pitch on the more cautious side to protect your initial capital, but as time goes by and you build both your wealth and your experience, you’ll find your natural risk tolerance level. This will help to guide the type and size of trades that you’re comfortable in making.

It’s clear to see that one of the biggest differences between investing in stocks and trading is the amount of time that you have available for your stock market work. Those who are looking to make some money on the side should consider investing as you can make a few purchase orders each month and simply watch as the value of your investments slowly increases. Those with more time should consider learning as they will be more able to take advantage of the smaller daily fluctuations in the stock market.

Both investing and trading stocks have the potential for you to make money using your existing capital, and both represent a way to increase your overall wealth at a significantly higher level than the average savings or CD account. However, it’s also worth noting that there is no such thing as a guaranteed win on the stock market, so you should make sure you are only investing or trading using funds that you can afford to lose if every decision you make goes south.