With the poor returns on offer from banks and building societies in recent times, those with an investment in need of protection from inflation are relying more than ever on the stock markets to achieve this. One of the first decisions they will need to make is whether to trade or to invest. The decision will usually depend on the investor as much as on the markets themselves, but a clear understanding of the difference is paramount.
Investing in stocks
Making an investment is a medium to long-term decision. This is because the money you are investing is usually being set aside as a nest egg some future date. Often this is for a significant life event such as a child going to university or your own retirement. Because the money has a significant purpose the primary motivation should be to minimise risk. The idea should be that this money will remain invested for the predetermined period and should only be liquidated due to some unforeseen circumstance.
Trading leveraged products
Trading stocks, on the other hand, is all about the short term. Stocks will usually be held for a matter of days or weeks. Whether the stocks are bought by an amateur or a professional, the goal remains the same : to play the market to their advantage and in doing so make money. However, wherever there are high rewards, there are likely to also be high risks. If the money being used is intended as a nest egg, the more sensible approach is likely to be to invest it over the longer term. However, if the money being used has no predesignated purpose then it may be a suitable asset for trading.
Having decided whether the sum of money will be invested or traded, the subsequent initial activity will be much the same. Companies will be researched in detail and stocks will be bought. However, when researching companies for an investment the investor will be looking for reassurances about the solidity and long-term performance of the business. The trader, however, will be looking for companies which are tipped to experience favourable transformations in their fortunes, such as a beneficial take over, product launch or new CEO. The investor and trader may be the same person, with the same pot of money; it is their intentions for how that money is used and how they want it to perform that define which of the two they really are.
Practice before you put your capital at risk
For a beginner considering trading stocks, a good way to test the water is to open a demo trading account on an online trading platform such as the excellent Next Generation provided by CMC Markets. This will allow you to learn how to speculate in a risk-free environment. You can put in to practice what you have learned so far, see how your trades perform and gain experience through a combination of hands-on practical activity and further research.