3 Truths You Need To Know About Stock Market Investing
I recently met an agent selling unit trusts. He asked whether I save regularly and have any investments. I told him that I’m a stock market investor and have built a stock portfolio. The agent responded quickly with two questions: “So, are you into trading? Isn’t stock market investing risky?”
I found the agent’s quick questions pretty amusing. It is a classic example of a person who believes that stock market investing is synonymous with stock trading. Investors and traders are often misclassified as the ‘same group of people.’ That is a misconception.
In this article, I will share three simple truths about stock market investing so that you can have a better idea about who investors are and what they do.
Stock market investors don’t trade
Let’s take Warren Buffett as an example. Is stock trading his forte? Obviously not. Warren Buffett is a stock market investor. He is focused on finding great companies and deriving their intrinsic value. From there, he would buy the shares of a company if its price is below his estimate of the intrinsic value, and he would hold onto the shares for the long-term.
The mindset of a stock market trader is different as a trader is attempting to make quick profits from multiple short-term trades in the market. Stock market investors would measure their expected gains and assess their stock deals very differently from traders.
Stock market investors don’t speculate
To put it simply, speculators are market participants who treat stocks like lottery tickets. They are interested in and would buy anything that has rapidly grown in price in recent times. To them, the stock exchange is like a legalized casino and they are mostly there to have fun.
Stock market investors think and act differently as they are very selective with their investments. Investors understand that continuous investments into good quality stocks at reasonable prices is key to building wealth over the long-term. This system to build wealth for stock market investors can be extremely boring to speculators.
Stock market investing is about earning high returns with low risk
Personally, I find it ironic for unit trust agents to bluntly stereotype stock market investors as ‘high-risk investors,’ and to brand unit trust investments as ‘lower risk’ vehicles.
Unit trusts that focus on stocks are established to invest or trade stocks on behalf of their investors. Investing in an equity unit trust is thus an indirect way of investing in stocks. The difference lies in the person making the investments.
Stock market investors, especially the profitable ones, have two simple objectives for investing: minimise risks and maximize profits. As I write this, there are thousands of public listed companies to choose from in the markets around the world. Stock market investors minimize risks by choosing stocks with superior financial results and maximize profits by buying their shares at low prices. Why? With superior financial results, the chances of a stock going bust is lower, and low prices equates to high dividend yields and a higher chance for capital growth.
The Foolish takeaway
If you have a sincere desire to consistently profit and build wealth from stock market investing, the first thing you need is to have the correct mindset and beliefs about stock market investors.
It is hazardous to get yourself mixed up or to be confused between investing, trading, and speculating. It is vital to learn and appreciate their differences before putting your money to work.