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Investing Does Not Equal Trading

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Investing Does Not Equal Trading

Your perception of stock investing may involve highly caffeinated, frantic traders sweating in front of a half dozen computer screens packed with information, while phones ring off the hook in the background.

Things To Know

  • Actively "day trading" is not how most good investing is done by individuals.

That perception is wrong

Feel free to dump these images from your mind, because solid stock investing is not about trading, having the fastest computers, or getting the most up-to-the-second information. Though some professionals make their living by creating a liquid market for stocks, actively "day trading" is simply not how most good investing is done by individuals.

Beyond having to expend an incredible amount of effort to track stocks on an hour-by-hour basis, active day traders have three powerful factors working against them. First, trading commissions can rack up quickly, dramatically eroding returns. Second, there are other trading costs in terms of the bid/ask spread, or the small spread between what buyers are bidding and sellers are asking at any moment. These more hidden frictional costs are typically only a small fraction of the stock price, but they can add up to big bucks if incurred often enough. Finally, frequent traders tend not to be tax efficient, and paying more taxes can greatly diminish returns.

Making the right moves is more important

Just as someone can be a great racecar driver without being a mechanical engineer, you can be a great investor without having a clue about how the trades actually get executed in the market. How your orders flow from one computer system to the other is of little consequence.

Just remember that investing is like a chess game, where thought, patience, and the ability to peer into the future are rewarded. Making the right moves is much more important than moving quickly.