Invest or Trade? There are important differences. Let's explore the pros and cons....

Sometimes, because you can do something, does not mean it is a good idea.

Personally, I have always been an investor. Extremely wealthy individuals such as Warren Buffett, Robery Kiyosaki, Grant Cardone, George Soros, Charlie Munger, Donald Trump, Sam Zell, Peter Lynch, Ray Dalio and so very many more have chosen to be investors. These are some of the richest people on the planet. However, can you name a famous trader? No?!

I would not be at all surprised if you could not name a successful and wealthy trader.

The fact that you can do something, does NOT mean that you should, or that it is a good idea!

In other words, the fact that you can trade does NOT mean that you should trade!

So why do some people insist on share trading?

If you are a property investor, you would buy well, ensure it is cashflow positive and keep the investment for many years, even decades. The costs of buying and selling properties are not conducive to "trading". Also, inflation pushed the value of the property up over time, and it just keeps compounding those capital gains! There are no taxable events on the capital gains as long as you do not sell the property, so a $1,000,000 property today may be worth $2,000,000 in ten years and you pay no tax on that gain (unless you sell).

Property investors keep adding assets to their portfolios, and hold the assets for many, many years! They understand the miracle of compounding, and understand capital gains taxes.

If you are a share investor, you are basically doing the same as a property investor. In essence, you are buying equity in good quality companies that are offering good value pricewise, and then holding them for the capital gains and the dividend yields.

All the wealthy stock investors are actually investors and not traders.

So why trade stocks?

There are many trading platforms available that promote "trading" as a wealth building tool, and it is.... for the brokerage firms! The brokerage firms make money on each buy and sell order that you place, so of course they will promote share trading!

In reality, a trader watches the market for hours every day, makes multiple buy and sell decisions, and hopes they make a profit. Of course, if they do make a profit, they must pay Capital Gains Tax before they can then draw profits for themselves.

Stock Traders have a full-time job trading stocks. It is what they try to do for a living, often unsuccessfully. Some may make profits from the exercise, and go on to then sell subscriptions to their "expertise". However, as I'm a cynical individual, I often wonder why they would need to sell subscriptions if they were making substantial enough profits from their trading?

Stock trading has another "issue", if you are focussed on your business (your "cash cow"), and trying to make profits for investing into assets, and if you choose to put your profits into share trading, then you will be taking the focus off your cash cow by spending time trying to trade shares. The result will be spreading yourself too thin and risk doing a poor job at both.

When I look at the pros and cons of trading v's investing, this is what I see:

Trading Pros:

• It is exciting to make daily gains

• It could be a full-time job

• It could make money

Trading Cons:

• It only works with shares

• It is very uncommon to create serious wealth by trading

• Every profitable transaction is a taxable event

• It fails to utilise the power of compounding

• It fails to take advantage of dividend income

• It is time consuming, and since time is what we are trying to get back, it is not conducive to our goals

• Trading can be distracting! You should be focussed on creating income and profits in your chosen business area, so you then have the funds to invest in low maintenance passive investments that will generate both growth AND income..

Investing Pros:

• It is a more tax-effective way to invest with no capital gains tax unless the asset is sold

• It utilises inflation for capital gains to increase returns

• It utilises the power of compounding to increse returns

• It works in the background, allowing you to focus of whatever cash generation vehicle makes the profits for investment (business, job etc)

• Investing is what the wealthy have done for centuries to generate their wealth

• Investing allows you to take advantage of dividend/rental returns for cashflow.

• It can be "set and forget".

Investing Cons:

• It is not exciting.

• There is no instant gratification

Of course, one can "trade" properties also. There are people that buy properties, renovate then and then sell then at a profit (hopefully). These people are also referred to as "house flippers". However, the buy and sell timeframe is quite long, usually 6-12 months.

The issues with this sort of trading are the taxable events at each sale, the long periods of negative cashflow on the property, the time-consuming nature of the concept.

House flippers usually treat this as their full-time job, rather than an investment.

In my opinion, investing is the far better option for wealth creation. It's Pro's far outweigh anything that "trading" has to offer.

Investing utilises tax effectiveness, compounding, takes advantage of inflation for capital gains, offers BOTH capital gains AND income returns, it runs in the background making your money work for you while you focus on creating further profits for investment.

For me, the choice is simple, and as Warren Buffett said “Calling someone who trades actively in the market an investor, is like calling someone who repeatedly engages in one-night stands a romantic.”