If you are looking to make money from the stock market, you need to decide whether to trade stocks or invest long term. While the underlying asset is the same, these approaches are completely different. The choice you make depends on your investment needs, and more importantly, time horizon.
Investing in Stocks
This is undertaken by individuals wanting to grow their wealth over the long-term. When picking which stocks to invest in, they consider factors like the type of business, its profitability, corporate governance and the dividends it pays. They then hold these shares over several years while expecting them to appreciate.
Investors in the stock market generally only sell their shares if the business fails to meet expectations, if they find a stock with better potential, or when they are ready to exit the investment altogether and convert the shares to cash.
One of the biggest advantages of stock investing is that you can earn long-term gains both from increases in share prices as well as from dividends. In addition, it does not require day to day management, making it an ideal source of passive income.
On the other hand, stock investments during extended periods of market downturns can result in significant loss of capital. However, since it is a long-term investment, there is normally time to recover such losses.
For effective stock investing, you will need a detailed investment plan which is in line with your goals and the capital available to you. You also need to be prepared for the long haul, which requires discipline and patience to weather day-to-day market fluctuations.
Trading Stocks
Traders are usually more concerned with making short term gains by buying stocks at a lower price and selling them off for a profit. They look for stocks with predictable share price patterns and use this information to decide what and when to buy and sell.
A major benefit of trading stocks is that it provides immediate profits. Moreover, it allows traders to apply various strategies that can make them money in both bearish and bullish markets. However, it requires a significant amount of expertise, market knowledge and sometimes, luck. It is also much riskier than long-term investing, usually due to factors beyond the trader’s control.
If you are considering trading, you can minimize risk by creating a plan that guides how and when you will buy and sell. You should also only trade amounts you are willing to lose. To maximize your profits, be aware of the various trading costs including taxes, brokerage fees and transaction charges.
Conclusion
The stock markets provide an avenue to make money whether by trading or investing long-term. To be successful in either strategy, you need to understand its fundamentals and make sure they are aligned to your financial goals.