I was reading a post on how long you should leave money in the stock market, which speaks great lengths about the importance of time when investing in the stock market. Time is a key factor because it separates stock market traders from stock market investors. Each method differs in the amount of time that a security is held.
Over time, a small investment can turn into millions over the long term, making a strong case for long term investing over short term trading as the best method for buying stocks.
Here are some factors that separate the two investment styles:
Time spent tracking investments
Stock market investors hold their shares for the long run, so there is no need to constantly obsess over short term gains. They always know why they own a stock and can tell you at moment's notice. When you invest for the long term, obsessing over a 10 cent drop in share price just seems silly. This type of long term style is my ideal method.
Stock market traders hold their shares solely for short term gains, thus they search for momentum stocks or short-term catalysts that will pump up or drown the stock price. Time plans a significant role in a day trader's job, so they must carefully manage their portfolio on a daily basis. Some track their investments on an hourly basis. Unless you know exactly what you're doing, it's just plain dangerous to gamble on the stock market.
Level of Investing Discipline
Long term stock market investors must show a significant amount of discipline to avoid chasing the Wall Street chatter. Fail to ignore all the stock market hype, and their annual market gains get eroded by commission fees. Investing requires a certain discipline to trust yourself and not gamble with your money.
Short term stock market traders put more emphasis on a stock's potential, rather than its foundation. Because of the short investment time frame, traders get nervous when short term catalysts disrupt the supply and demand characteristics of the stock market. For instance, after Apple (AAPL) presented MacWorld, everybody wanted shares, which caused a 15% surge in stock price to $97 from $85 over the next two days. Where do shares trade now? Of course, $85! Apple didn't change as a company, but short-term catalysts changed the stock price. You should stick to investing if short term events bring out too many emotions.
What's your investment focus?
We must pull out our investment plan, and give it a solid review. A concrete plan will eliminate “stock market limbo” – the tendency to vacillate on your investment decisions. See if you follow your plan perfectly, or completely ignore it. I've been guilty of disregarding my plan at times, yet forced myself to alter my investment portfolio accordingly. Your plan was designed to help you. Follow it, and guidance becomes one less investing factor you have to worry about.
How do you go about buying stocks? Are you a day trader, long term investor, or a little bit of both? Provide your theory/philosophy on how to make money in the stock market.