The art of investing and trading in stocks dates back to the 16th century in 1531 when Belgium opened the first stock exchange in Antwerp. After about two centuries, the London Stock exchange was established in 1773 in the United Kingdom. 19 years later after the opening of the London Stock exchange in the UK, the New York Stock Exchange was opened in the United States of America. This was however not the fast stock exchange in the US since the Philadelphia Stock Exchange had been established before NYSE came into being. Nevertheless, NYSE grew much faster to be the leading stock exchange in the US today.
Stock markets provide platforms where investors come to trade and invest in stocks. To be an active participant in the market, you need to be well versed with the different terminologies and tactics used in share trading for you to have an advantage over your competitors and take home large gains. To begin with, you need to differentiate between trading and investing. Investing I stocks involves a long term commitment while trading in stocks is a short term affair where by you buy the stocks at a lower price and sell them immediately the price moves up to your desired level.
Investing in Stocks
Long-term investment in stocks is most commonly referred to as value investing. This comes from the fact that you are making the investment decision solely based on the value you attach to the stock. For value investors, they view each stock not necessarily as the ticker symbol assigned to it at the stock exchange, but rather as the real company represented by the ticker symbol. In that regard, as a value investor, you fast conduct a fundamental analysis of the company to find out the value of the company before investing your money in it. Fundamental analysis involves a rigorous process of taking a deep dive in analyzing the financial strength and performance of the company you want to invest in in order to find out its real value; what investors call intrinsic value. Historical performance is analyzed and future growth prospects weighed through scenario analyses in order to find out whether the company is worth investing in.
After the fundamental analysis of the stock is over, the value investor then compares the company’s share price based on their intrinsic value with the market share price of the company. If the intrinsic value is higher than the current market share price, the stock is considered to be undervalued and the investor will buy it today at the current market share price. This is pegged on the belief that in the long-run the share price will rise and get to its intrinsic value based on its strong business fundamentals. When the market share price hits or exceeds the intrinsic value price, the investor then sells the stock and pockets the returns on investment. On the other hand, if the current market price for the share is higher than the intrinsic value, the value investor will not buy it, since the price correction will result to a lower stock price in the future.
Trading in Stocks
Trading in stocks is different from investing in stocks, not only in terms of time periods, but also in terms of the analyses involved. Whereas in investing the investor goes through a rigorous fundamental analysis to finally determine the stocks to pick and which ones to drop, a trader uses technical analysis to make quick purchases and sales of stocks. For a trader, time is very important in the decision making process and therefor they do not have the pleasure of spending several weeks of months analyzing any given stock before making a buy or sell decision on it.
Technical analysis comes in handy in this case to help the trader make an informed prediction of how the share price of given stock will move over a given short period of time. This aspect of making predictions based on market sentiments and news about companies is what makes traders be referred to as speculators. A successful trader must master the art of reading stock charts and use the charts to make trading decisions. Since the market prices of shares are always changing, the trader also needs to have the skill of fast decision making under high pressure. In the end, the efforts made by traders are rewarded by super normal returns if they make accurate price trend predictions and markets work out in their favor.
Whether you choose to be a trader or an investor, the driving factor will be your risk appetite and how soon you need returns from your investments. However, apportioning your investment portfolio to both investing and trading is sure way to diversify your risk and maximize your returns.