A Beginner’s Guide to Investing and Trading For Young Adults
Looking to grow the savings accumulated from your pocket money, national service allowances, or part-time job? Read on for a better understanding of investing and trading!
Alternatively, scroll to the bottom of this article to check out a compilation of resources!
We may have heard of the terms “investing” and “trading” — two different ways to profit from financial markets.
So, what’s the difference between investing and trading?
Investing
In general, investors have a long-term horizon to progressively build wealth over an extended period by buying and holding a portfolio of financial assets (equities/stocks, bonds, mutual or exchange-traded fund, commodities, futures, real estate investment trusts (REITs), foreign exchange (forex), collectibles, and more). Investors tend to build diversified portfolios of assets to mitigate the effects of volatility in the market and often hold their investments for years. In the case of stocks, investors take interest in identifying undervalued stocks (value investing) and/or growth stocks (growth investing), by analysing fundamental metrics such as price-to-earnings and price-to-book ratios.
Trading
In contrast to investors, traders pursue quicker profits. They buy and sell securities within a shorter time frame, ranging anything from mere minutes, to weeks, and often translates to more frequent transactions within financial markets.
Common Types of Traders
- Day Trader — buy and sell securities within the same trading day
- Swing Trader — buy and sell securities over days to weeks.
Unlike investors, traders use technical indicators and follow the latest news reports to predict short-term price movements. Technical analysis indicators include:
- On-Balance-Volume indicator (OBV)
- Accumulation/Distribution line (A/D line)
- Moving Average Convergence Divergence (MACD) Indicator
Which is Better — Investing or Trading?
Investing and trading are two different approaches to participate in the financial markets — so which is better?
On the whole, trading is entails bigger risks as it involves quicker decision making and a greater deal of speculation.
A study conducted by the University of California suggests that the greatest pitfall in trading is overconfidence. Traders with an inflated sense of confidence are overly optimistic about temporary price movements, and since price movements are typically small, some traders may even resort to using leverages — that is, borrowing money to enhance their immediate buying power—in aims of making more substantial profits. Options, margin trading, or short selling are all ways of leveraging. As such traders are exposed to extremes of outcomes and could end up speedily trading to their detriment.
On the flipside, investors take a safer approach by considering core factors of assets that can drive their value in the long run. They also possess greater holding power — an ability to hold onto an investment for an extended period of time without selling — which allows investors to tide over temporary fluctuations in asset (eg. stock) prices and achieve better investment outcomes. A famous example of a successful investor is Ronald Read, a janitor based in the United States, who died a multimillionaire at 92 by amassing wealth from stock positions and property worth about $8 million. It was reported that most of Read’s investments were found in a safe deposit box, and those investments included AT&T, Bank of America, CVS, John Deere, GE, and General Motors. Quoting from Read’s attorney, “He only invested in what he knew and what paid dividends.”
The Verdict
Before making your first move in financial markets, perhaps decide on an approach based on: your level of time commitment, risk tolerance and financial goals.
If you have a high-risk tolerance and short-term financial goals, it may be worthwhile to seek the thrills and opportunities in trading. However, investing and trading do not necessarily have to be mutually exclusive. You can choose to participate in the market as both an investor and a trader by allocating an amount for long-term investments and a separate amount for short-term trading. To mitigate your risk of losing all money in just a few trades as a hybrid, some trading experts have advised against risking beyond 1% worth of portfolio on a single trade. That is to say, with every $20k allocated for long-term investments, no more than $200 should be spent for a trade.
“You do not have to be particularly smart; you just have to be patient.”
— Warren Buffett
Some Resources For You
The following resources have been curated by our writer, Reina, who is the current treasurer of SUTD’s MarketWatch Community. With just over a year of investing experience, she empathises with the uninitiated and hopes the following list of resources will be helpful for those just starting out on their personal finance journey.
SAGE
We know that starting life as a young adult isn’t easy. That’s why we have a curated community of Sages, from university students to working professionals that are passionate about sharing their wisdom with others.
For more personalised advice on how to manage your finances as a student, stay afloat of your school expenses, and enjoy those supper nights with your friends, sign up here and type “@SAGExperiences_bot finance” in our Telegram Bot! Once you’ve signed up, you can request to chat with any Sage, from students to professionals experienced in personal finance anytime and anywhere!
YouTube Channels to Watch
Chicken Genius Singapore
In Chicken Genius Singapore, financial YouTuber Chicken Genius (Ken Teng, retired at age 38) shares technical analyses and insights in his investments with a primary focus on growth stocks to help Singaporeans achieve financial independence like he did.
The Fifth Person
The Fifth Person offers investment and financial literacy knowledge in a group discussion format. Their latest series, Roundtables — Stock Talk & Analysis, presents casual discussions and insights about trending stock picks.
Instagram Pages to Follow
The Woke Salaryman
The Woke Salaryman offers comic-style story-telling content that covers an extensive range of relatable topics for Singaporeans to make better financial and life choices, money habits, etc., sometimes even defying conventional routes preached by the older generations.
The Simple Sum
The Simple Sum provides bite-sized personal financial knowledge for Singaporeans, using colourful visuals and easy-to-comprehend content.
SAGE aims to be the largest community of Apprentices and Sages. Ultimately, we hope to build meaningful connections between individuals of all ages. If you feel lost, confused, or perplexed with the uncertainty of your future career or purpose, or simply need a second opinion on your life plans, we welcome you to join our family, where we connect you with Sages (Experienced Sharers), to walk alongside you in your lifelong journey.
If you have something you would like to share with others instead, we welcome you to join us as a Sage or to be our esteemed guest in our Fireside Chat Sessions.
