Should I trade or invest?
There is a misconception going around that trading is investing. Well, not exactly. Knowing the difference may help you become a better investor, or even a trader, for that matter.
Let’s face it, we all have at least one friend on social media who shares his or her success through trading stocks, foreign currency, or cryptocurrencies over a short period of time. The humble brag is followed by an invitation to everyone to join him in his journey of trading these assets for a profit using investible cash.
When you are hooked with interest and ask him how, he proceeds to lecture you about how it is a waste of time to put your money in deposits, funds, UITFs (unit investment trust funds), insurance funds, and whatnot, and that trading is the best way for you to “invest”.
Then here comes the question, should you believe your friend and trade your hard-earned money for profit?
First, let’s restate the above scenarios to what is true.
- Investing should be a part of managing your finances.
- It is possible to earn a huge income through trading.
Remember your purpose
However, there is one truth that is oftentimes undermined: There is no one investing activity that fits everybody.
You see, trading is an investing activity, but it is not what defines the term “investing”. Trading is not the be-all of investing. It is the act of making short-term buy or sell transactions with the purpose of selling or buying the same at a profit – buy low, sell high over a short period of time. Trading can give you a huge payout if you have correct calls consecutively, but it can also lead you to a huge loss of principal if you repeatedly make the wrong calls.
On the other hand, investing is a purpose-driven action where you put your money to work in response to your unique, individual monetary needs. These needs are distinct and incomparable in totality, no matter how similar you are to individuals in terms of personality, state of living, etc. Trading is simply a type of investing activity.
Which ROI do you want?
For example, Edison and Ron have been best friends since the first grade. They lived in the same community and went to the same school. They both have PHP 100,000 in each of their accounts. Edison takes up a trading position and grows his money to PHP 120,000, or a return on investment of about 20%.
He immediately hounds Ron to join him in trading, saying that the activity is easy to learn and that he can have that same 20% return on investment, or ROI. Should Ron? Well, to be honest, he could. But he must consider all his needs first. The thing is that Ron already has a 6-year-old daughter. He needs the PHP 100,000 to pay for her school fees over the next six months.
While trading activities may give Ron a huge payout, he is also putting his capital at risk. His trading calls to buy or sell may turn out wrong (i.e., he decided to buy, and the stock price fell, or he decided to sell when the stock price turned positive).
Consider the risks
Trading could work very well for Edison, who can spare cash for losses, but it may not work as well for Ron, who may need the money soon. If the trading call goes wrong and Ron’s principal falls by 50%, he’ll have a headache. He won’t be able to pay for his daughter’s tuition.
It turns out that a six-month time deposit would suit him better, given his current needs. The returns may be boring compared to what trading may or may not bring, but at least he has the principal ready when he needs it the most.
You see, trading is not bad. Trading is not gambling if you do your homework, if you do your own research before making investment decisions. Consider your investment PATH (Purpose of your fund, Appetite for risk, Time horizon, and other Hurdles).
Do the work
If you can afford a long waiting game and have the willingness and capacity to take bigger risks, then you can have a bigger trading position. Otherwise, it would be better to take a moderate stance when investing.
Trading requires discipline. It shuns greed. It entails humility to accept when you are wrong, take the losses, and start over. It comes with the responsibility to do your homework in order to understand what and why you buy and sell. It requires effort, but it’s necessary work that will save you from gambling.
DON CARLO P. HERNANDEZ, CFA, is Metrobank’s Head of Portfolio Strategy and Advisory Division under the Trust Banking Group. He leads the research, credit, and portfolio solutions team in providing a strategic point of view regarding the investment efforts of the whole group. He advocates for financial literacy and inclusion, especially for the young and unbanked. He is an old soul and a music junkie who listens to Frank Sinatra and Michael Bublé. He also enjoys spending his free time resting under a tree.