Trading is not investing

Stop calling trading “investing”.  You can invest in a trading business, but the business of trading is not investing.

An investment is expected to go up.  You provide your money to an entity that will use it to produce goods or services that will bring a return.  Return = growth = value of the company goes up = your investment increases in value.

A trade is directionally agnostic.  You are either buying or selling expecting to sell or buy later accordingly at a better price.  This is most “natural” with commodities, which are produced, moved, stored and used every year, therefore aren’t constantly growing in value per se.  The people and businesses who produce, move and store commodities do increase in value as they indeed offer a valuable service, use the earnings to reinvest in the business, expand it and grow it further.  It’s less normal for stocks, which indeed reflect underlying investments (that’s why short-selling in stocks isn’t as common).

Yet, even trading stocks is different than investing in stocks.  Trading is like accumulating an inventory of stuff that you will sell later (or sell the inventory in advance and buy it back later if you expect prices to go down).  When I buy corn, I’m not giving the “corn gods” money so that they can grow and increase the value of corn. I’m just buying it because I expect the supply and demand relationship to go in my favor and the price to reflect that relationship.  Similarly, if I think the demand of soybeans is below expectations, I sell beans until I think the price is right enough for new demand to come in and support the price, at which point I will buy them back, pocketing the difference.

Makes sense?  Just don’t confuse trading with investing or vice-versa!


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