Sunday, January 22, 2012

Investing vs. Trading in the Stock Market

I just got off the phone with my Mama. I informed her (as I try to be open with her regarding our financial strategies) that we have started investing in the Philippine stock market. Her first reaction was, “Aren’t you scared? I hear about people committing suicide because of the stock market...”

It is not because we are not scared. But when we think about the possibility that after years of toiling overseas we might find out that all we have is a house and money in a savings account (which will be grossly devalued because of inflation), and worse we might have to rely on our children for financial support when that savings account runs out... now, that scares us more. It is this fear that fuels us to look for better ways to build our retirement fund and one way is investing in the stock market.

Take note I used the word “investing” not “trading”.

What is the difference between investing and trading? Well I will try to explain.

Philippine stock market

Trading is treating a stock as a piece of paper to be traded later, which means buying a stock in the hope to sell it immediately to another party when the value increases to gain a substantial profit. To be an effective trader you have to monitor the market continuously, study the patterns and analyze based on stock prices movements. If successful in a venture, one is able to see huge returns in a short period of time. But miscalculations can also lead to terrible losses.

No thanks but we don’t have the appetite for that. We rather sleep during the chilly winter nights peacefully. What we are comfortable with is investing.

Investing on the other hand is buying a share or interests in companies based on solid fundamentals and holding it for the long run. We don’t have to worry about market fluctuations because we believe that the companies we invest in will grow in value and stay profitable in the future.

During the selection process of a company to invest in one has to research the company’s financial statements over the years, its management and the industry it is in. This may be overwhelming but don’t let this stun you into inaction. For a start invest in blue chip companies first, which are companies performing reliably over the decades i.e. PLDT, San Miguel, Ayala Corporation etc.

We think of investing in the stock market as lending our money to the companies we strongly believe in so they can have more funds to grow, generate more jobs and in turn help the economy. We hope for a better Philippines by the time we retire.

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