Investing In The Stock Market Vs. Trading The Stock Market

Investing in the stock market is a lot different than trading. Investing should be based on a thorough fundamental analysis of a company from the inside out.

Long Term Investing

You have to start by looking at the key statistics that make up a company’s financial position(earnings, revenue, profitability, cash flow, long term debt. All of these numbers can be found on the income statement, balance sheet, and statement of cash flows.

Fundamental analysis involves looking at all of the major components of a company and trying to determine its value. Most long term investors tend to be fundamental investors. Warren Buffett is a great example of a long term investor.

Short Term Trading

Trading is a different animal altogether. When trading you don’t have to worry about the long term value of a company because you are trying to get in and out of a position. A trade can be as short as a few hours or as long as a few months.

Traders lean heavily on technical analysis. Technical analysis is based on price movements. You buy a stock when it is in the low end of a range and you sell it when it moves toward the high end. This involves studying charts, market trends, and trading volume.

Which one works best?

The answer to that question is It depends! I know that’s not an exciting answer but it is the truth. I have been able to make money investing in the stock market as a long term investor. I dabble in trading stocks but it’s not my forte. I do have friends that swear by trading stocks.

They have been able to generate profits by trading stocks on a short term basis. They use technical analysis to tell them when to buy and sell a stock. You can make money by investing and trading in stocks.

In my opinion the best strategy for the average investor is fundamental analysis. Most people are not sophisticated enough in the art of buying and selling stocks rapidly. That requires a lot of time and TA trading. Plus you can lose quite a bit of cash if you guess wrong.

My Strategy

The strategy that works the best for me is to buy and hold until my price target is met. I do not buy stocks for any predetermined period of time. I buy on the basis of price. I set a price target for every stock that I own and then sell once the stock hits that price.

This could happen as quickly as a month or as long as a few years. Once my price is met, I cash out and start over again with another company.

What strategy do you use? Has it worked for you?