Investing is defined as holding a position more than a year. Here is a quick overview of the pros and cons of this long-term strategy. Remember investing isn’t actually trading. It’s not enough to simply save a lot of money– if you was your savings to really multiple, you have to invest.
The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds, and other investment instruments. Investments often are held for a period of years, or even decades, taking advantage of perks like interest, dividends, and stock splits along the way. While markets inevitably fluctuate, investors will “ride out” the downtrends with the expectation that prices will rebound and any losses eventually will be recovered. Investors typically are more concerned with market fundamentals, such as price-to-earnings ratios and management forecasts.Anyone who has a 401(k) or an IRA is investing, even if they are not tracking the performance of their holdings on a daily basis. Since the goal is to grow a retirement account over the course of decades, the day-to-day fluctuations of different mutual funds are less important than consistent growth over an extended period.
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How to Start Investing for the First Time
Decide on an investment approach. When you invest your money in the stock market, there are a few different approaches you can take.
- Open an investment account
- Fund your account with an initial deposit
- Set up automated transfers of money to your investment accounts
- Buy assets to build a diversified portfolio
Advantages of Investing
The investing time frame is the most popular. Because it’s less active, the term trading is not used for investing. Following are some of the advantages of investing, particularly compared to trading:
- Investing is the least “active” approach to participating in the markets. It can be good for those who have an interest in the markets but don’t have enough interest in it to make it a part of their daily or weekly schedule.
- Some people have extreme difficulty doing short-term trading. Some, in fact, believe it’s impossible to determine short-term moves with consistent accuracy. For such people, investing may be a good choice.
- Holding a position for more than a year potentially allows you to tap into the long-term capital gains tax, which is generally a lower tax rate than short-term capital gains tax.
- This is not meant to be tax advice. Please consult a competent and qualified tax professional for details about taxes as they apply to the time you’re reading this and to your individual situation.
Here are some of the disadvantages of investing over trading:
- Of the three time horizons, investing can be the slowest way to make money, assuming that you could be an excellent swing trader or day trader.
- Because investing reuses the same capital very infrequently, the annual returns are generally not as good as a successful professional trader.Earning an average 10 percent return annually may be considered acceptable for an investor. However, some day traders have made 10 percent returns in a week! That’s certainly not meant to be an income claim, nor is that normal, but, yes, it does happen.
- Investors notoriously have a very difficult time outperforming the market — making investing decisions that result in a better return than if you simply invested that same money into an equity index fund, such as the S & P 500, and didn’t touch it. Even many professional fund managers aren’t able to do that for their clients after costs.
Trading often utilizes the stop order. Stop orders, in trading, dictates the price at which you are willing to buy or sell. This can mean a stop-limit order, where you set both a price that would trigger an order and a limit on the amount you will use to buy, or a stop-loss order, which dictates the price that triggers an order to sell. These are designed both to help you buy securities at a reasonable price and help you sell them before incurring major losses (though neither of these are guaranteed).While buy-and-hold investors wait out less profitable positions, traders seek to make profits within a specified period of time and often use a protective stop-loss order to automatically close out losing positions at a predetermined price level. Traders often employ technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups.A trader’s style refers to the time frame or holding period in which stocks, commodities, or other trading instruments are bought and sold. Traders generally fall into one of four categories:
- Position Trader: Positions are held from months to years.
- Swing Trader: Positions are held from days to weeks.
- Day Trader: Positions are held throughout the day only with no overnight positions.
- Scalp Trader: Positions are held for seconds to minutes with no overnight positions.