Cramer explained that when you buy a stock as a trade, you're buying it for a specific short-term catalyst, some anticipated future event that will drive the stock higher.
This event may be a company's quarterly earnings, or it may news-driven, like a Food and Drug A drug approval. In either case, the plan is to buy a stock ahead of the catalyst and sell it afterwards. Once that window passes, however, investors must sell their trades, good or bad, Cramer said.
An investment, on the other hand, is a long-term trading thesis that is not event-driven. Cramer said investments are not an excuse to buy and forget because they can still go wrong. That's why he recommends one hour of homework a week for each stock in your portfolio. As long as your investment thesis is still intact, he said, investors can continue to own their investments.
"Never turn a trade into an investment," Cramer reminded viewers, even if that trade is a successful one.
The Dreaded 'Correction'
Cramer's next item in the Wall Street dictionary: the dreaded "correction." Cramer said a correction is nothing more than a roaring market turning around and retreating, sometimes as much as 10%. He said corrections may feel like the end of the world, but panicking is always the wrong reaction.
Cramer explained that corrections are simply what happens when stocks go up too far, too fast. Investors should expect corrections, he said, and not beat themselves up if they fail to see one coming. "We don't have to like them," said Cramer, "but we do need to acknowledge that they happen."
Cramer's final word for the day: execution. He said this is a tough one since it's largely subjective, but execution usually refers to management's ability to follow through on its plans. When you own a stock, he said, you always run the risk of management screwing up and not producing what they promised.
Cramer said this is why it's always worth paying up for what he calls "best of breed" companies. "You want companies with proven, seasoned management teams," he said, because they're less likely to drop the ball.
To watch replays of Cramer's video segments, visit the Mad Money page on CNBC
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-- Written by Scott Rutt in Washington, D.C.
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