What is the difference between an investor and a trader? Some argue that an investment is merely a longer-term trade. Others argue that the difference lies in the intent of whether you purchased the stock primarily for the dividends paid by the company, or for the capital gain.
The trading and investment industry is a very large and diverse industry, with more than US$5 billion being traded throughout the world each day. Large sums of money have been made (and lost) by people investing in coins, stamps, medals, art, gem stones, precious metals, real estate, stocks, bonds, breeding rare animals and birds, and even tulip bulbs. Stocks, bonds and real estate are the largest and most understood investment vehicles. Clearly, each form of investment has its own advantages and disadvantages.
- Allows one to start with a relatively small amount of money.
- Allows one to take almost immediate action to buy and sell stocks, unlike property that takes much longer.
- Allows one to sell part of an investment, whereas real estate requires the full property to be sold.
- Has transaction costs which are much lower than those of an equivalent property investment.
- Allows investments to be monitored easily.
- Allows one to obtain an accurate valuation quickly, at any time.
- Allows one to choose a broker from a large list of reputable firms that offer a range of services at reasonably competitive rates.
- Allows one to choose from a diverse range of stocks, thus maximizing one’s returns while spreading the risk.
- Is free of blatant outside manipulation, due to the activities of regulatory bodies.
- Has proven to be one of the safest forms of investment, if one knows what one is doing.
- Is free of fund management fees.
- Can have considerable taxation advantages.
The main disadvantages of investing in the stock market include the need to:
- Acquire knowledge of what one is doing if one is to achieve consistently superior returns.
- Have a reasonable capital base to ensure that one is not exposing too much capital to any one investment, and to ensure that one can obtain a big enough return.
- Have the discipline to enter and exit the market when entry and exit signals are given.
- Monitor your investments.
Also, stock markets can be exposed to sudden downward market movements. (This can be an advantage, if you sell short stocks at the time!)
The good news is that, through gaining investment knowledge and experience, you can overcome these disadvantages, or at least minimize their impact.
Of course, you should bear in mind that most of the disadvantages of stock market investments are also disadvantages of other forms of investment. Also, bear in mind the unique, and often significant, disadvantages of other forms of investment before being too critical of the stock market as a trading and an investment vehicle. Gems, for example, can be stolen; property can be extremely difficult to sell at times of recession; gold can spend decades without significant moves in price, and rare breeding animals or birds can be infertile or die! Even money placed in a bank account can lose its purchasing power at an alarming rate during times of high inflation and/or low-interest rates.
People are attracted to trading and investing in stocks for many reasons. It is certainly true that there are considerable advantages in living the life of a successful full-time trader and/or investor. These include:
- Taking control of, and having responsibility for, one’s own destiny.
- Not having to be at the beck and call of a boss.
- Not having to endure the constant responsibilities and pressures of running ones own client-service business.
- Being able to work from almost anywhere – you need little more than access to data and a telephone to place orders.
- Being able to complete one’s work in an hour or so per day, or less.
- Having time for other pursuits in order to live a healthier, happier, more balanced and more fulfilling life.