The Difference Between Investing and Trading

One of the first things I tell people when they come to me to learn how to trade is to forget everything they know about investing. Trading and investing are two different things, and it is important to recognize the difference. If I am investing in a stock, I take the time to get to know that company. I care about the P/E ratio, the long-term prospects, the products they have in the works, the management and the company's competitors. But if I am trading, there is really only one thing that matters: What is the stock doing?

And I mean just that. I don't mean where will it be heading next week, or what I think it should be doing. I mean, what is it actually doing? As simple as it sounds, this is often a difficult concept for investors because they are accustomed to analyzing and forecasting.

Beginners vs. Investors

Oddly enough, I have a far greater success rate teaching people with no experience to trade vs. teaching people with investing experience. Why is that? Because someone who has no preconceived ideas will take everything you say at face value. If you tell them to buy or sell a stock when these indicators line up or these conditions are met, they do it, no question and no hesitation.

They follow the system you give them faithfully and consistently because they have no reason to doubt it. And as any good trader knows, it's not so much the system you choose, but your discipline in executing it that leads to success. So within a short amount of time, these beginners are often trading circles around more-experienced traders.

An investor, on the other hand, brings a lot of baggage. They love to "second-guess the tape" based on past experiences. Good investing experiences have taught them to hold a "trade" longer than they should. Bad investing experiences have taught them to sell too early or hesitate before entering. And of course, the investor will want to bring fundamentals into the equation.

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At the time of publication, Wolff had no positions in the stocks mentioned, although positions may change at any time.

Ken Wolff is founder of MTrader.com, the first educational daytrading site on the Net, and co-founder of InvestingOnMomentum.com, a Web site devoted to short-term potential for retirement accounts. TheStreet.com has no affiliation with InvestingOnMomentum.com, and no endorsement of InvestingOnMomentum.com or momentum trading is intended. While Wolff cannot provide investment advice or recommendations here, he appreciates your feedback; click here to send him an email.