Should you trade or own stocks? What is the difference between the two?
With TikTok and every other video platform out there, a lot of amateur and novice investors have become investment guru’s overnight with thousands following. While some of them explain in a minute or two how they made millions per trade. Others have open challenges to the public that they’ll turn $300 to $100,000 in 1 month. It’s absolutely crazy and insane. Is that how you make money? Haven’t you worked hard for the money you have, what if you lose the money on one single trade trying to be a millionaire, are you ok with it?
First of all, trading is buying the stocks today and selling it may be on the same day or the next week. You are betting the stock’s movement over an event – for example, an earnings call, special event or huge product announcements.
Whereas with stock owning, you hold the stock over the longer term (3-5 years at least). And you are not as concerned about the recent stock events or if one or two earnings reports in not on par as per expected.
Trade vs. Own Stocks (Example)
To explain better, let me consider wall street’s two favourite stocks with huge volatility.
Apple and Tesla.
First, let’s begin with Apple.
Well, Apple recently had a product launch event where they showcased the brand new shiny iPads (Air and Pro) and Apple Watch, but not the iPhones. (12 and PRO, 5G phones)
The end result, the stock was down to $104 levels.
I do agree that the entire market is down.
But, with the case of Apple, the market/investors were probably looking forward to the next-gen iPhones to be released. (5G phones).
Even though everyone knows that the new iPhones are coming before the holiday season kicks in, still people trade stocks that are meant to be owned. You will see the iPhone 12 launch event like the way you did for iPhone 11, iPhone X ( the first $1000 phone from Apple) or the iPhone 7 with Matt Black finish. At the end of the day, Apple sells! Believe me, Apple can sell anything, they have the quality, product, people and the cash to sell! One more thing, the product works! Every single time.
Anyways, Apple is a stock you own. Not trade.
Another small note, about the option trades and the Robinhood folks. And then you have the put and the call options, seriously you want to try this shit? How do you sleep with all your money betting on some stupid event? The market can be crazy upon you. People with billions are trading on Wall Street and you think. you can beat them? Good luck then my friend.
Look here’s the thing right, no one can predict the stock market movements. People who bet that Tesla’s stock will hit $500 or even $600 after the battery day event or prior to that were all wrong. The call options were crazy. However, the stock ran up from $330 levels to $450 and is now back to $380 levels. People were holding on to sell even higher and lost. That’s options trading, you cannot predict and you lose steam wanting to make more unless you are a pro to book consistent profits which is impossible again.
If you believe in Tesla, it’s an amazing stock to own, the battery event was fantastic. As an Investor, you need to know and watch the event. Not trade the stocks of the company you believe in. If you invest, you stay invested. You don’t just give up on your favourite NBA team just because they lost a game or two.
Instead, I’ll rather prefer Warren Buffet’s way of investing. Even though I am not in total sync of how he invests. I love the fact that the majority of his investment money is in Apple, even though he doesn’t own an iPhone 😉
I am more of a tech stocks fan than the passive dividend growth machines. I do not own Berkshire for the same reason. I don’t believe in the stock, nor its principles. But, I like Warren and follow what he says.
Coming back to Apple’s example.
If you believe in Apple as a company, its revenue, the products, Tim Cook and the management. You’ll win. Might not be today but tomorrow for sure.
I do own the Apple Shares and I’m proud of it. I have every product from Apple. I love em. I can find their products everywhere around me. I know it’ll stay. I read their investor’s relations page top to bottom. I may not be a finance guy but I make sure to understand how diversified their revenue is. I know why they are the #1 in terms of market cap. That’s why I have invested. I don’t option trade. I know their next earnings call is on Nov. 4th. I know they will launch the iPhone 12 in a separate even shortly. It’s not like I know everything about Apple. I read about them from good leads, not every news 🙂
I won’t trade Apple with FOMO. Let it dip to $80 or $50 even, I am not selling. Similarly Microsoft or Amazon. you don’t trade them. You own them.
A quick example – In 2014 when I first moved into Canada, Apple stock was trading around $90.
In, 2020, the stock was trading at $500 dollars. Yes I get it, the markets went crazy and the stock moved. But the stock would have either way moved with or without the split event. If not today then tomorrow.
Do you think the smart millionaire investors have sold the Apple stocks now after the massive gain? I bet no, they might have sold a part of the portfolios, but not completely. That’s profit-booking, anyways.
Forget Apple and Tesla for a moment, do you believe in owning Netflix, FB, Microsoft, AMD, Amazon, Google, Berkshire Hathaway, Oracle, Adobe? I said owning! Then go ahead, once you own, follow the company, if the earnings are bad and stocks fall overnight, buy more and wait patiently. Rinse and repeat.
Give it 5 years, you will be rewarded in a genuine way.
Do not learn options trading to make a quick buck or two or get rich schemes. That’s not how things work. Your money can be eroded overnight. Shortcuts never ever work.
To make money you have to invest and wait. But, Invest in honest blue chips. Penny’s are no good.
Try the dollar-cost averaging, Investing is an art, you need to have lots of patience. Believe and wait for the returns!
Don’t be affected by the market corrections! Follow the right people on social media (investors) and have the correct mindset on how to trade.
Invest only the money you can. If you feel confident in tracking only one company – then invest only in one. You do not need to diversify to make money.
For example – Investing in Apple, Microsoft, Amazon and FB (all 4 stocks with 25% allocations) will reduce the risk of your overall portfolio. True. But, that does not mean investing in Apple alone, you’ll be under losses. No way. Instead, by investing only in Apple, you can track the stock better and buy more when the stock is on a downward move (Dollar-cost averaging) and so much easier to manage, instead of complicating over the portfolio %’s and what to hold and sell.
For example – Amazon, will do good no matter what. I am sure it will return 5 – 10X in the next 5 years. The product model is as such. Similarly, with Apple, I know it will go back to $500 in the next 5 years. I know I will make money with this investment.
In this article, I’ve tried explaining the differences between trading vs. owning quality blue-chip stocks.
Never opt for risky investments such as options trading, it can erode your money overnight. Be wary of such get rich soon investment principles. Investing is an art that only a few can master, be one of them. Investments need time to grow.
Always, build wealth the right way, one wrong move and you’ll find it hard to get back up, losing money.
Invest small but consistently every month. Invest only how much you can and in the companies you believe in.
Thanks for reading. Please let me know your thoughts and comments below.
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Sagar Sridhar is a personal finance blogger from Canada. His genuine passion for personal finance coupled with his unique style of writing is what stands out. Professionally, he is a computer engineer, agile certified and has a master’s degree in Project Management. His writing has been featured or quoted in the leading Canadian publications such as Credit Canada and many other personal finance publications. While he is juggling between his day job and blogging, he is the main author on this blog and has miles to go before making the final pit stop.