What Is the Difference Between Trading and Investing?

Many people struggle with the difference between trading and investing. Some individual's feel that they are the same thing and those people can't be further from the truth. The best way to show the difference between trading and investing is to define both terms.

Investing is the process of purchasing assets specifically for the return made from interest, rent or dividends. On this basis, long-term equity buy-and-hold, property and fixed interest holdings are all investments. This is the concept of income over time and is what the majority of people do with their retirement funds and long-term investing strategies.

Trading on the other hand is the endeavour of taking advantage of a movement in an underlying asset's price. As such, short-term speculative positions in any market specifically in order to profit from the movement in the asset's price would be classified as a trading strategy.

To reconfirm, investing is buying an asset specifically to profit from the secondary returns on an investment, while trading as an endeavour is specifically in order to profit from movements in the investments underlying price.

Interestingly, as investing focuses on holding an asset for a secondary return, traditional investors cannot be in the market on the short-side. Short selling is selling an asset anticipating a fall in the asset's price in order to profit. Essentially, it is the same as buying, then selling, but in the opposite order.

Our work specifically focuses on trading, which has several notable advantages over investing:

• More spoke of potential market (foreign exchange for example)
• Higher potential for leverage (which can enhance returns)
• The ability to sell short an asset (thus also taking advantage of price falls as well as gains)
• Either way, whether you are a self led investor, or a trader trading directly through an online platform, your choice of broker may well be the most significant decision you have to make when beginning trading.

A broker can be anything from a "trading coach" to someone who simply provides trade execution. Either way, and as you would expect, you must simply decide on a broker who can provide you with the services you require.

Brokers earn their money from commissions on sales in most cases. When you instruct your broker to buy or sell a stock, they earn a set percentage of the transaction. Many brokers charge a flat 'per transaction' fee.

There are two types of brokers: Full service brokers and discount brokers. Full service brokers can usually offer more types of investments, may provide you with investment advice, and is usually paid in commissions. Discount brokers typically do not offer any advice and do no research - they just do as you ask them to do, without all of the bells and whistles.

A short check-list of questions you should ask your prospective broker are:

• What is their level of experience
• Are they experienced in the markets that you wish to trade
• Can they provide trade advice or recommendations
• Can they spend the time providing coaching to you
• Do they actually provide excellent execution and fills on trade
• Do they fit your style and personality

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The Difference Between Investing And Speculating

Everyone wanted to get into the game. Real estate was the darling topic at cocktail parties and from your hair dresser. People were quitting their jobs and running after real estate riches. This frenzy was fueled by lenders who were giving loans to anyone who can fog a mirror a loan - with no money invested. Loan requirements were being relaxed to Prozac-like standards. Teaser low rate and negative amortization loans were everywhere. Appraisers appraised at way over market values. Why buy just one property when you can get five and make even more money? After all, if my manicurist can do this, why can't I?

What could possibly go wrong?

Well the bloom is off the rose.

After 20 years in this business, I can tell you this is no surprise. I have been telling people this since 2005. Everyone was saying that low interest rates were fueling the market and that when interest rates rise that will be the end. Well interest rates have actually gone down and still real estate in collapsing. Millions of people have adjustable rate loans that are adjusting. Banks have swung the pendulum in the other direction and are over cautious about who can get loans and how much they have to put down. No one wants to buy the junk sub-prime loans that were created so they could be sold to hedge funds, other central banks and unsuspecting pension funds.

The real estate market is flooded with newbees who are really speculators - not investors. These are people who are ruining it for the rest of us. They don't bother to educate themselves; they don't go to real estate clubs to network; they don't buy tape sets; they don't go to seminars. They depend on the advice of people who have something to gain from their actions. These promoters do not care whether they are giving good advice or not - as long as the promoter is making money. Everyone has something to pitch - new construction bought before the shovel is in the ground - ideas that are just ideas.

These speculators don't bother to find the right places to learn about what is happening in the real estate market RIGHT NOW! They were hypnotized by all the hype that was going on about how the real estate market will go up forever and that this time is different - there won't be a downtown. Sound familiar? Just like the stock market hype in the year 2000. Everyone swore that things had changed and that history no longer repeated itself. It seems that all these ex-stock investors were pouring their money into real estate. There just does not seem to be any other place to put money. However, even the stock market is scary and lately, so is real estate.

These people were under the delusion that what goes up will continue to go up forever so all they have to do is buy anything at full market price, take out a no money adjustable rate loan and rent it and hold onto it for a few years and make big bucks. Well some of the people who ran to Vegas and tried to do that already found out the hard way that there were thousands of others doing the same thing and they could not rent the house. Even if they could, renters don't always pay and sometimes they destroy things. Think that can't happen elsewhere?

Now the difference between these people and true investors could not be more dramatic. These people are learning the hard way that what goes up will eventually come down.

We investors were taught to buy below market for appreciation and cash flow through improvements to the property. I was always taught that you make money the day you bought the property. If you have this philosophy, you can never get hurt. No matter what happens to interest rates or prices, I bought right. If it appreciates, fine - that's only the gravy. The meat and potatoes were the price I paid. I don't care what happens to interest rates. I only keep properties with fixed rate loans under 6%.

It is more important now than ever to become educated. All the people I trained with say the same thing; buy below market and make your own appreciation, buy for the long haul and let your tenants pay off your loans, or buy for cash flow. DON'T BUY FOR APPRECIATION!!

The scariest thing about all this is that usually real estate markets are regional as well as cyclical. After all, economic conditions are different in different parts of the country, so when one market is up, the other one is down. Well, it looks like the markets across the county had the same bad thing happen to them at the same time - like rising interest rates and teaser rates adjusting. Things could get ugly for the whole national economy. Not a pretty thought!

Well, that's when the fun begins for true investors like me and I hope, you. It is imperative to get educated so you know the difference between investing and speculating or the school of hard knocks will educate you.

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Where Real Estate Investing and Speculation Collide

Some uninformed folks would describe someone who rehabs distressed property as a "speculator" or even a "property speculator." Don't be fooled! There is a VAST CHASM of difference between rehabbing and property speculation.

Let me explain. According to Dictionary.com, the definition of speculation where business is concerned is:

"Engagement in risky business transactions on the _chance_ of quick or considerable profit."

"A commercial or financial transaction involving speculation."

While all investing...in anything... has some element of risk to it, I want to highlight a key difference between speculation and investment. When you speculate, risk is higher and by the nature of the word speculation, more risk than usual is implied.

So, in that context speculation doesn't fit what I advocate at all. I'll explain further, but first let me illustrate the difference between investment and speculation in real estate rehabber terms from something that happened to me just this week.

I got a call; a "hot" lead from my wholesaler. The property was located on the fringes of a hot area of my town called Riverside. Riverside is an area where historic homes are being bought at inflated prices and fixed up very nicely! Put simply, properties in Riverside at in demand. Well, that's in the heart of Riverside, but this house was on the distant edge of that part of town.

The house was 934 square feet. Great area, yadda yadda. My wholesaler needs $81,900 and he was the house's "repaired value" will come in at around $120,000. He continually repeated something he heard from an appraiser about values "around" Riverside being a great investment over the coming years.

I agreed to go and take a look. Before I did, I do some of my own checking. From the tax records available online, I learned that the house was built in 1942, just changed hands last year for $72,000 and was of wood construction with asbestos shingling on the outside.

It didn't look good when I looked at the numbers. IF...and in my mind a big if...the appraisal came back at $120,000, then the 70% I can get a hard-money mortgage for is $84,000. So, my mortgage would only cover a portion of my closing costs, but none of the rehab. In addition, a few months ago, I bought a property a few blocks away for $38,000. I'm just not seeing the value in this property BEFORE I look at it.

When I looked at the property, it had some things going for it. It looked to be in pretty good shape and was on a corner lot. In truth, it needed $10-12K rehab. One negative is that it was square and there is no porch under the roofline to easily add square footage for increased value. The neighborhood is fair but two things jumped out at me:

- There is a couple of very old apartment buildings on the street. Normally this would not bother me in the least, but these will prevent the yuppie crowd from rushing into the area in a buying frenzy.

- Every other house within sight was also very small and of simlar construction. This means the houses on this street are not the architectural gems in the historic and sought-after areas of Riverside.

If the money situation would have been better, that is to say, if this was a better investment, I would buy, Buy BUY! If the spread allowed me to buy and rehab it with little or none of my own money, I would have.

But, if I bought this house and rehabbed it with considerable out-of-pocket investment, I would be speculating on the area, and I had my doubts.

Of course I didn't buy it, but if I had, that would be speculating!

So, how would I define speculating?

- Speculating involves taking on more than usual risk.

- Speculating involve banking on values that aren't there today, and aren't projected to be there based on NORMAL conservative appreciation rates.

- Speculating is banking on external or environmental factors to make you money.

***External and Environmental Factors (that pertain to property) are factors that are not part of the property itself such as neighborhood, infrastucture, city, the paper mill down the road, rental demand, etc. ***

What is investing, but not speculating?

- Buying property that you are "safe" in, meaning you could rehab it and sell it in the short term and make money.

- Buying property that will make you money based on what you bought it for, current environmental factors, and conservative appreciation rates.

- Buying property such that hope is not part of the strategy!

One of the key factors in STAYING a successful real estate investor is strict adherence to your investment strategy and criteria which are tied closely to your investment goals.

A good real estate investor does what works over and over again and does not take on more and more risk as they go. Smart investors only ventures into other, uncharted investment areas (e.g., single family homes to commercial property) after careful investigation.

I think I can safely speculate that the most successful real estate investors incrementally decrease their risk as they gain experience. Not the other way around.

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Difference Between Systematic Risk And Unsystematic Risk

Major differences between systematic and unsystematic risk are described as follows:

1. Meaning

Systematic Risk: It is a part of total market risk which arises due to external factors like economic factors, political factors and sociological factors.

Unsystematic Risk: It refers to the part of risk which is associated and arises due to the internal factors within the company.

2. Nature

Systematic Risk: It is non-diversifiable risk, so it cannot be reduced or controlled by the management.

Unsystematic Risk: It is diversifiable risk, so it can be reduced or controlled by the management.

3.Factors

Systematic Risk: It occurs due to the external factors.

Unsystematic Risk: It occurs due to internal or organizational factors. 

4. Affects

Systematic Risk: It affects the whole market and the economy.

Unsystematic Risk: It affects only a specific industry or business organization.

5. Measurement

Systematic Risk: It is measured by the help of security's Beta. Beta is the indicator of systematic risk.

Unsystematic Risk: There is no such tool to indicate or measure this type of risk. It is calculated by deducting systematic risk from the total market risk.

6. Sources

Systematic Risk: Market risk, interest rate risk, purchasing power risks etc are the major sources of this type of risk.

Unsystematic Risk: Business risk, financial risk, insolvency risk are the major sources of unsystematic risk.

7. Examples

Systematic Risk: Change in interest rate, inflation, price changes, high unemployment rate etc are the common examples of this types of risk.

Unsystematic Risk: High labor turnover, high operational cost, strike in the company etc. are the examples of unsystematic risk.

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Difference Between Investment And Speculation

Major differences between investment and speculation are as follows:

1. Meaning

Investment: It is a purchase of assets with the expectation of regular return.

Speculation: it is a financial transaction with an expectation of capital gain or substantial profit.

2. Planning

Investment: It is a long term planning (at least one year or more).

Speculation: It is a short term plan (only for few months).

3. Risk Disposition

Investment: It involves only modest risk.

Speculation: It involves higher level of risk.

4. Expected Rate Of Return

Investment: It expects for a modest rate of return because of moderate risk.

Speculation: Due to higher level of risk involved, it expects higher rate of return.

5. Leverage

Investment: Investor's own funds and property is used.

Speculation: Generally borrowings from others are used.

6. Income Type

Investment: Income is certain and stable in investment.

Speculation: Income is uncertain and unstable in speculation.

7. Behavior

Investment: Investor possess caring and cautious behavior.

Speculation: Speculator possess careless and daring behavior.

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Reasons For Investment

Main reasons for investing fund are as follows:

1. For Supplementary Income

This is one of the main reason for investing the fund. Investment helps to grow money which helps to supplement the income.

2. To Minimize Tax Liabilities

Investment in life insurance, retirement fund, citizen investment fund etc. offer tax rebate. This minimizes tax liabilities and investors may enjoy tax benefit.

3. Protection From Inflation

Invest is necessary to get protection from inflation because idle fund or money reduce its value over the passage of time. Investment helps to earn nominal rate of return and maintain the purchasing power.

4. Starting Or Expanding Business

Many people invest money to start a new business or to expand their existing business for higher income. 

5. Excitement And Hobby

Some people invest their money for excitement and hobby also by following other people. 

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Characteristics Of Investment

Main features or characteristics of investment are as follows:

1. Risk Factor

Every investment contains certain portion of risk. It is a key feature of investment which refers to loss of principal, delay in payment of interest and capital etc. Most investors prefer to invest in less riskier securities.

2. Expectation Of Return

Return expectation is the main objective of investment. Investors expect regularity of high and consistent income for their capital.

3. Safety

Investors expect safety for their capital. They desire certainty of return and protection of their investment or principal amount.

4. Liquidity

Liquidity means easily sale or convert the capital or investment into cash without any loss. So, most investors prefer liquid investments. 

5. Marketability

It is another feature of investment that they are marketable. It means buying and selling or transferability of securities in the market. 

6. Stability Of Income

Investors invest their capital with high expectation of income. So, return on their investment should be adequate and stable.

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