TRADING AS COMPARED TO INVESTING

What’s up, aren’t they the same green dragon casino thing after all? Consider the following scenario: a buddy of mine wanted to establish a bar, but he needed some people to contribute money to help him pay for a space, equipment, staff cost coverage, and merchandise to get the business up and running. He approaches me and invites me to invest (keyword) in his bar company as a joint venture partner. Consider the following scenario: I agree to do so and provide him with $5,000 to cover these early expenses in return for a share of the company.

My buddy now completes all of these tasks, but I return a week later and demand that my $5,000 be returned to me immediately. This is, without a doubt, a completely absurd situation. Due to the possibility of spending the money before even opening the bar, he may not be able to scrounge together $5,000 (much alone continue to run).

I would hope that you would never do anything like this to another person. Even if you did, a commercial partnership would almost always include some kind of tacit or explicit profit-sharing arrangement, which would prevent you from just changing your mind after a week.

To your advantage, you may do this with stocks without alienating any of your colleagues or peers.

Investors: Stock investors must place a focus on the prospect of long-term gains from purchasing and keeping stocks in a specific business in order to be considered successful. Assuming I were to make an investment in my friend’s bar, we could divide up ownership percentages depending on how much money was put in, and at the end of the year, I might receive a share of the profits, if there are any.

We may eventually discover that I have gotten a return on my investment and that I still own a portion of his bar and restaurant company. As a consequence, I’ve earned a good long-term return as a result of this. During this period, my buddy may make a one-time offer to purchase my whole stake in the pub.

In any event, I made the investment in the bar because I felt that my hypothetical buddy could operate a profitable bar as long as he had the necessary funds to get started.

In a similar vein, investors will research a business (or really believe in a new company) and determine whether or not they feel the company has a promising future. They intend to purchase and retain the stocks for an extended period of time, which is not necessarily predetermined, and to include them as part of a diversified portfolio.

Traders: While some individuals do both, and there may be the odd crossover (intend to invest long-term, but decide to sell sooner than anticipated), stock traders are far more concerned in the short-term movement of a stock than the long-term movement of the company.

Market participants are more concerned with short-term price movements than they are with the long-term prospects of a business. It is possible that a trading firm may find itself purchasing and selling ownership in a single business many times, while an investor will only own shares.

Traders will even participate in “day trading,” which is defined as the simultaneous purchase and sale of a single stock on the same trading day of the week. Depending on the day trader, a stock may be held for just a few minutes before being sold!

The Securities and Exchange Commission (SEC) has established specific rules to prohibit low-value traders from engaging in day trading. It is possible that the most restrictive of them is the requirement that day traders maintain an account balance of at least $25,000 with a certain brokerage firm in order to participate in “Pattern Day Trading.”

Traders with a lower account balance may participate in rolling four-day transactions during a five-day period if their account balance is less than $10,000. In the event that they do more than this, they will be labeled as “Pattern Day Traders,” and they will be prohibited from engaging in any day trading for a certain period of time until their account balance reaches $25,000 or more.

According to theory, this limitation is in place to safeguard inexperienced and amateur investors since day traders may suffer massive losses in a single day’s trading. Another popular strategy among day traders is to deliberately choose volatile stocks that have the potential to see significant price declines within a short period of time…and then panic (sometimes correctly, usually incorrectly) and sell them.

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