Through a lot of sacrifice and sheer willpower, you have somehow managed to save up a reasonable amount of money. Now comes the hard part – how can you “make your money work for you?” For the less informed and perhaps (without sounding too harsh) the lazy among us, we would simply not ask the question and leave it in our bank accounts to earn a negligible rate of interest. However, if you are a firm believer in the wonders of compound interest and willing to take on more risk, then learning about the stock market can prove to be financially very fruitful and educational!
There are two somewhat distinct styles and schools of thought surrounding the ways in which one can profit from the financial markets, and that is through investing or trading. In general terms, the goal of investing is to gradually build up wealth over an extended period of time through buying and holding a portfolio. This portfolio can contain anything from shares in a company, corporate bonds, investment/unit trusts and much much more. Often investors will choose to reinvest any profits and dividends into additional shares. The holding period for investors is often much longer than say your average trader, and is often willing to ride out short-term fluctuations in the belief that their underlying fundamentals remain strong. Investors are typically more concerned with market and company fundamentals, tending to focus on examining a company’s true intrinsic value by understanding their related economic, financial and other factors.
Trading on the other hand is often associated with people taking a much shorter time horizon in their decision making. Unlike long term investors, traders are often opening and closing out their positions within the same day (i.e. day traders). They are more interested in the short term fluctuations of a security and will seek to profit from such volatility.
Regardless of which approach you take, the questions remains: “What style suits me best?” Only you can answer that for yourself. There are many factors that will influence your decision. The financial markets can be incredibly volatile – Brexit and the US election being notable examples. If you don’t have enough capital, your positions could swing wildly out of your favour which may trigger your stop losses prematurely. Having to put up more capital to pay the margin calls from your broker is not a pleasant position to be in. Investing provides a good opportunity to get people started in their journey to profiting in the stock market, given one can only lose as much as they put in.