by James Robinson

Created on: February 09, 2009

It is important to know the difference between investing and trading in the stock market.

The discussion here is directed not to the investor but to the neophyte trader, someone who has yet to learn, one who is contemplating putting their own money at risk. A risk that can only be minimized by following some practical guidelines, frequently cited but frequently ignored in the excitement, success, failure, or greed, that is ever present in the arena of speculation.

The trader is usually much more active than an investor in buying and selling stocks, holding the stock positions for shorter periods in the attempt to take gains when they do occur or to minimize the inevitable loss that is part of speculative trading.

Yes, significant financial gains can be made when trading in the stock market, even to the extent that an individual can become financially independent.

But of course, it can also be said that one can start with a fortune and end up with the proverbial shoestring. It takes time and effort to learn the fundamentals of stock trading and a lot of willpower to follow sensible guidelines to manage risk and take the necessary action called for in those guidelines. Early on one realizes that it is difficult to take a loss. When faced with the need to act, to sell a losing position, the temptation is to just hold for a little while longer, "maybe it will recover" is the thought that overrides the guideline that indicates sell. That guideline would have set a percentage range of loss that can be tolerated by traders who have the discipline, so the correct move is to sell and move on, there are usually other opportunities to act upon.

Good traders practice good risk management by limiting losses when they are wrong and letting profits run when they are right.

There are many reasons why stocks fluctuate in price over time and it is the objective of the trader to buy or sell stocks in order to profit from those fluctuations, to buy stocks at a lower price from which they will rise and/or to sell stocks at a price from which they will fall. In this way, when transactions have been completed, if a satisfactory overall profit has been achieved, a profit at least equal or close to the planned target profit, it can be considered that the objective has been met.

There is no formula that can guarantee a profit and successful traders accept the fact that they will indeed make losing trades as well as profitable trades. Obviously, the need, as far as possible, is to minimize the losses and to maximize the gains so that the overall end results will be shown to be profitable to the degree that the return on the monies at risk will be greater than if they were invested in any other legitimate endeavor.

Wise advice for the beginner is to spend $10.95 and buy William J. O'Neil's book "24 Essential Lessons for Investment Success", as the sub title says, from that book you can learn the most important investment techniques from a renowned and respected trader and the founder of the daily newspaper Investors Business Daily. Why not check out the book and the newspaper at your local library? There is a lot to Learn.

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