Trading vs. Investing
People get theses two mixed up all the time. Specifically, they consider their trading activities investing. We disagree, we believe they are two different things. One is not necessarily better than the other, you need to be both a great trader and investor, doing either or, when the timing is right.
Investing or investments, for our definition, is investing into assets for a long period of time. When we invest into real estate, we are buying to hold the assets for a very long period of time. We are investing into the real estate and the local economy. We aren’t trading real estate, we’re investing in it to hold. Someone who is doing fix and flips, buying and selling, would be more of a trader in this sense, buying and selling, although they’re a little different because they’re adding a lot of value to it. But none the less, they aren’t really investing in the real estate, it’s a quick way to make money, and that’s really it.
When you raise capital for your startup from investors, you’re not looking for traders. You’re looking for people to invest in you, your vision, and the company for a long period of time. You’re not looking for people to just buy shares of your company and turn them around for a profit within a short period of time.
When people start day trading stocks, or even cryptocurrencies, buying and selling them short term. They think they’re investing, but they’re not, they’re actively trading. Looking at the prices all of the time, and getting in and out based on short term news and trends. This isn’t investing. Investing would be going long on a specific stock or cryptocurrency, investing in the company long term, your money would be invested to fulfill their growth, or holding value in the cryptocurrency ecosystem for the long term.
In the US, the IRS has two definitions for gains. Short term and Long Term Gains. Short term gains, are assets bought and sold within 2 years. Long Term are assets held after 2 years or more. Short Term Gains are taxed at a much higher rate, the ordinary rate you’d pay on your ordinary actively earned income. Long term gains, you get a discounted tax rate, generally 20% for the highest of income earners (2018).
If you generate short term gains, you’re more of a trader, and if you’re getting long term gains, we consider you more of an investor.
As mentioned earlier, one isn’t necessarily better than the other. You need to be both good at trading and investing to become truly rich. You need to find assets to invest in, long term that provide you a lot of value over the period of time. But when there is a necessary event to sell them, like the company is no longer going to be relevant, and you’re sure of it, or the asset values went up so high that it just makes a ton of sense to capture a gain, then it’s time to trade. You invest, and then you trade when the time is right.
Are you trading, or are you investing?
Know the difference when you do deals.
