Traders are the cupcake, sushi, and frozen yogurt shops of the world. Much in the same way that these current food craze shops pop up and then disappear a few months later, traders buy and sell financial assets regularly, but never hold onto any asset for a long period of time.
Investors, in comparison, are the neighborhood restaurants of the world. You know, those establishments that serve hundreds (maybe even thousands) every weekend night? These are the joints cooking up your favorite Friday night filet and putting out consistently great food. These are the places run by chefs who know that hard work and overall vision will pay off in the long run.
Investing Is Believing
Investors buy shares in companies with the hopes that these companies will eventually provide a solid return on investment. While trendy spots open and close as popularity increases and decreases, that time-honored spot will please its patrons for years to come. Just as you would book a reservation days in advance at your favorite restaurant because you know that extra effort will be worth it, investing is believing. Of course, that believing is based on solid research and investment fundamentals. Few investors grasp this concept as well as the infamous Warren Buffet.
Warren Buffet is synonymous with value investment. Buffet often buys shares in companies that appeal to his business sense. Buffet devours company plans for breakfast and spends most of his days deciding on the next best investment.
Investors like Warren Buffet are not out to make money as fast as possible. They’re not looking for thirty-minute meals. Instead, investors are seeking to make money in the future by sticking with an investment as long as it makes sense.
Most investors spend a good deal of time searching for new ventures, researching those ventures, and then investing in a company for the long haul. An investment may provide a good return, but this is not always the case and shares fluctuate regularly.
Why the Market Loves Traders
Instead of focusing on a company’s goals or background, traders are largely concerned with supply and demand needs, price patterns, and the current state of the market. Many people prefer trading to investing, since trading doesn’t require any amount of commitment. A trade can be made quickly and then sold just as quickly (just as that questionable dish you recently tried at the coolest new spot in town). It can turn into a game, especially if you’re chasing that great stock tip you overheard at the watercooler.
The market, as a whole, also prefers trading to investing, for different reasons. Essentially, traders (primarily the institutional sort, like insurance companies, investment banks, hedge funds, etc.) keep the market moving. By constantly buying and selling shares in a company, these fast-and-furious types provide liquidity to investors. Brokerage firms also make a good deal of money on fast trades (since these firms earn commission off of every trade), and far less when it comes to investments, and this can be a slippery slope for the new investor.
Often portrayed as the “easy” way to invest by financial media, trading seems like the fast and lucrative road to take – especially when you consider that trading requires a lot less research than investing. But, just like the current “it” spot, a good trade can turn into a bad trade quickly. Just ask Jamie Dimon at JPMorgan.
There’s no telling how long you’ll have to wait in line at that hip spot for a taste of sushi-yogurt fusion food and there’s no guarantee that that your food will be worth waiting for – there’s even less security in trading. Trading can seem like a sexy way to play the market, but trends and trades fade fast. If you want to make real money, investments are what you’ll want to sink your teeth into.