If your mind is confused about a concept, your behavior will also be confused.
For example, many people have a big misunderstanding about "trading" - they regard trading as gambling, and ultimately their trading behavior will inevitably be related to "guessing the rise and fall", "betting on the size", and "relying on luck". How to correctly understand trading is the first lesson for a trader.
In the financial market, there are many different behaviors and strategies, with different goals, methods and risks. For example, the familiar "financial management", "investment", "speculation" and "trading" are relatively common financial terms. If you don't understand the difference between them, you may think you are investing, but in fact you are just speculating.
Today we will talk about their differences.
First, let’s get to know them:
Financial management is the management of finances (property and debt) to achieve the preservation and appreciation of finances. In a broad sense, financial management actually includes investment, trading, speculation and other behaviors. If divided by subject, there are generally four types of financial management: company, institution, family and individual.
When it comes to personal financial management, the most familiar thing is bookkeeping, such as personal WeChat bookkeeping, which records what types of changes have occurred in funds through WeChat. From the classification, we can view the income and expenditure of funds in various aspects, and then manage funds, develop good consumption and savings habits, and achieve some long-term goals. Financial management is relatively easy to understand. Below we will mainly talk about investment, trading and speculation.
Investment is the process of converting money into capital, that is, investing money in those valuable and growing targets, and obtaining corresponding profits through the appreciation of their own value. For example, investing in company stocks to earn dividends, investing in bonds, investing in equity, earning interest on deposits, investing in real estate, etc., all fall into the category of investment.
The most important point here is that investors focus on the long-term value of industries and underlying assets.
Transactions are prevalent in our daily lives. In a broad sense, buying a bottle of mineral water or going to a restaurant for a meal are all transactions, but here we are only discussing financial transactions in a narrow sense, which refers to the behavior of buying and selling various financial assets in the financial market, such as stock funds, options and futures, commodity contracts, foreign exchange transactions, etc. Through technical indicator analysis and the execution of trading strategies, we can earn the difference in capital price fluctuations.
Speculation is a behavior that seeks short-term profits, usually related to short-term market fluctuations. Speculators usually buy and sell based on short-term market changes to obtain quick profits. Speculation and trading have something in common: focusing on prices and earning the difference in asset price fluctuations.
The difference is that trading is the execution of an established strategy system with a strict entry and exit mechanism; while speculation generally has no fixed system and is more subjective and random, which is what we usually call "trading by feeling."
Well, here we can actually roughly understand their differences, but just looking at the definition is not enough. Next, let's look at their differences from several other aspects.
1. Generate motivation. Is buying stocks necessarily an investment?
Not at all!
This is related to your motivation for buying: If you buy because its value will rise in the long term, and you focus on the relationship between value and price, then it is investment; if you know through technical indicator analysis that its price starts to fluctuate, and then execute it according to your own system, then it is essentially trading; if the transaction is simply made because of price fluctuations, without a systematic execution, and you believe that it will rise based on subjective feelings, then it is essentially speculation.
2. Characteristics of the subject matter
For investment, the subject of investment generally has its own value, such as the company stocks, bonds, real estate, etc. mentioned above. These subject matters may increase in value over time and with the development of the industry. For example, housing prices can rise due to the development of the city, and companies can increase profits due to good management, thereby realizing the value-added of investment. Trading and speculation pay more attention to the price of the subject matter and the factors that affect the price. For example, the so-called "air coins" such as DOGE and SHIB that are common in the digital currency market do not have value when they are issued, but because of their popularity, consensus, and strong publicity, they have attracted a large number of followers to buy, resulting in a rapid increase in the price of the coin, thereby realizing profits from trading and speculation.
3. Transaction cycle
The investment cycle is longer than speculation and trading. Buffett once said: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. In other words, if you don’t think about holding a stock for ten years, don’t even think about it. So in the eyes of the stock god, the investment cycle should be calculated in “years”.
Trading and speculation are different. Their cycles can be long or short. Usually, dozens or even hundreds of transactions can be made in a year. Short-term traders can even generate dozens of transactions every day. They pay more attention to price fluctuations. As long as fluctuations occur within the holding period, they have the opportunity to profit.
Let’s stop here for today and make a summary at the end of the article. Let’s first understand what financial management, investment, trading and speculation are from the definition, and then understand their differences from three aspects respectively, and how to identify our own decision-making type.
Finally, before every trade, ask yourself:
“Are you investing, speculating, or trading?”
I hope this sharing can help you. If you have a better way to distinguish, welcome to leave a message in the comment area to learn more financial knowledge together!