What Is Investing?

First, let's start with the basics: what does it even mean to invest in a stock?

Investing is the use of capital/funds to purchase shares of a stock. Each stock has a fixed number of shares at any given time (this quantity is called the outstanding shares) and, if you were to buy every single share of the company's stock, you would technically own the entire company! So, shares represent small pieces of ownership of a company, and when you invest, you are buying shares of a company's stock.

Next, what are the types of analysis that you can use for investing?

There are two main kinds: Fundamental Analysis and Technical Analysis. Fundamental Analysis is the analysis of a company's fundamentals, such as revenue, net income, margins, and many other metrics to assess the value of a company. Then, based on your impression of the company's value compared to how the stock has performed and the current market valuation of the company, you can decide if the company is a worthy investment and is undervalued. Alternatively, Technical Analysis is the use of market trends, price data, and technical indicators to determine buying and selling opportunities that can be profitable. Technical Analysis is often used by day traders, and we will discuss the different timeframes of trading/investing in the next section.

The three most common timeframes of trading/investing in stocks are called day trading, swing trading, and investing. First, day trading is when a person buys and sells a stock within the same day, exploiting much shorter-term trends in price action than long-term investing and targeting far smaller profit per trade than from an investment, but at a much higher frequency of trades. Next, investing is the most common form of trading: when someone buys and holds a stock for an extended period of time, usually at least 1 year. Investors often engage in fundamental analysis of a company to evaluate its long-term potential and macroeconomic analysis to understand the current market's conditions when choosing long-term investments for their portfolio. Lastly, swing trading is like what comes in between day trading and long-term investing. Precisely, it is when a person purchases a stock and keeps the position anywhere from 1 day to several weeks, usually not more than a few months though.

Out of the three timeframes of trading, day trading is considered the most speculative and risky. By many, day trading is even considered a form of gambling due to its seemingly random results and high rate of failure among day trader. It is estimated that roughly 90% of traders who start trading either quit or lose too much money to the point that they are forced to quit. Entire books can be written about what makes day trading so much more difficult than investing, but in short, there are many other dimensions of complexity to being a profitable day trader that have a lesser effect on long-term investors. This includes having extremely strong control over emotions, staying humble, and having the discipline to stick to a strategy even when it fails here and there. Investing, on the other hand, allows larger room for error because when a stock has truly good fundamentals, stable growth, and the market as a whole is strong, given that investors hold for several years, the likelihood of profitability on long-term investments is much higher.

Lastly, over the course of this post, I have only discussed stocks but there are several types of "things", more formally referred to as securities, that you can invest in or trade. Other than stocks, you can trade ETFs, bonds, mutual funds, options, futures, REITs, and more! In my next blog post, I plan to give a beginner-friendly explanation into what many of these other types of tradable securities are and how they work!