Trading Or Investing: Is there a real difference?


"Knowledge is the main factor in the re-distribution of income"

Anonymous

 

We have decided that our first post here not to be about a specific algorithmic strategy or in general about algorithmic trading, but to start from the very fundamentals. So today we will comment on a very common question that we found our selves been stumbled upon in countless times: "Trading or Investing? and what is the difference between these two notions, if any"?


 

Its in our nature to tend getting blurred from notions and then experience the phenomenon well known as: "from Analysis to Paralysis". However, the worst thing is that misinformation drives to the misconception, and as we all know this has a huge implied opportunity cost.

Financial economics, tend to obscure the average citizen of our meta-modernized society and even with as much as free information anyone can acquire, this doesn't bring the analogous effect in his(her) education/knowledge about this field. Well, finance is not rocket science and you don't need to have an IQ level similar to Richard Feynman (Nobel Prize Laureate in Physics,1965) to understand and exploit the way it functions to our benefit. So, here we go...

First thing first: Markets are "living" society's organisms which were created since the first need for a good or service couldn't be produced or provided by a single person. That's why you knock your neighbor's door when you forget to buy sugar or you're out of salt, or you need help to find a good doctor's phone number when you don't know one. Of course, since your neighbor won't be always there for you, or you will be embarrassed to ask him for something all the time, you need either to study medicine or produce coffee by yourself. But how realistic is that? not at all. Hence, what you will do is to go to a physical or intangible place to find what you need for a certain cost, and that is the market. And since we used the notion of cost, unavoidably kicks in the art and science of economics. Because goods and services are scarce and your purse depth is not unlimited, you need a method, you can call it a strategy, to handle this problem of non-abundance and get the most you can with less.

Financial Markets, is the market place that you have to go when you seek: a) credit b) debt and in general returns for exchanging risk. Your cost here is double, in contrast with the common markets for goods and services: the initial amount of monetary recourses you need to spend and a level of risk that you are willing to exchange for a future return. To make things more simple, how many of you would go to a supermarket to buy a kilo of coffee or a couple of chocolates, if you knew that they may not be delivered after the cashier? How many of you would buy a ticket to watch a movie, with the probability of not seeing it?

Since we believe we made our point clear by now, and in two paragraphs (even a bit long for a post but someone needs more than 6 years of higher studies to be specialized in them), we explained to our audience the notions of markets, economics, financial markets, their accompanied purpose of existence, and the costs and returns of participation in them, we now can proceed to the main theme of our title. So trading or investing? and what is the difference? "Hold on" one could scream out loud, now: "What the hell is investing, is that this Warren Buffet thingy which a very old super wise man appears in CNBC channel talking about stocks and money and the future to a bunch of reporters and journalists who are talking gibberish"? and "when you talk of trading, do you mean like the pit of Wall Street which people are shouting their throats off for a dime, ready to rip each other head off"?

Well, investing and trading are related to the above said but as any can easily understand they're far-far more than this. Investing is to sacrifice your present consumption to increase your future one. Trading is to exchange something that in present time you find more useful or valuable for what you are willing to trade for. Thus, "investing" is a method, a strategy (does that remind you something?), that you use to be more wealthy in the future, sacrificing some things that you may acquire in the present time (consumption), aiming to be able to spend more in the future (you, your sibling, or your inheritances). So the first main two differences between the notions of investing and trading are, a) to invest is a strategy aiming at the future time, and b) to trade is an action aiming at present. You cannot have the first without the second but not vice versa. The existence of investment is bounded to the existence of trading, but you can always trade without starting or following your investment strategy.

To recapitulate: Markets are the places that you go since you cannot produce everything you need by yourself, economics is the science which deals with your utility maximization limited to your current level of wealth (quantity of recourses), financial markets are places that you chose to go when you seek returns in exchange of risk and finance is a part of economics, which it may advise you for picking the right method to increase your future wealth via an investment strategy. Last but not least, trading is the act you do when you're participating in any kind of market and of course in the financial markets, also.

Dear reader, now that you (almost) know everything about the real notion of these initially complex notions of trading and investing, we would like you to answer the question we posed in our title: We believe that now you have the intellectual clarity to give this answers and many other answers to questions that were tarnishing you in the past, related to this field. We answer that there's no difference between "investing and trading" because they are simply not comparable. If anyone tries to "mess-up" with you about that fact, saying and supporting something different, our advice is to just run as soon as possible from him, because he's not for good and especially yours...

Our job here in ALGO JAMHP is nothing else but to find suitable and most of all applicable answers to problems such as return maximization under the constraint of a certain level of a portfolio's value and under a given level of risk appetite. Apart from all that, one is the most important thing that we will give our best to make certain through this internet portal: you don't and won't need to run from us...


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