What is the difference between trading and investing? The way we think about it, they are two main differences.
- Trading has a shorter holding period of days to months. When you invest your are typically thinking of holding something for at least a year and often several years.
- Investors will be focused more on the fundamentals of the company and business, whereas traders often care less about the fundamentals and are just looking for a short-term catalyst that they expect will move a stock (or other financial instrument) up or down.
Investors do fundamental analysis by looking at the management of a company, analyzing products and comparing them to competing products, projecting revenues, earnings, and cash flows into the future, analyze a company’s sector and how it fits with trends in the economy, and many other things of that nature.
Traders are often looking at things such as whether a company is going to beat their earnings estimates the next quarter, new products that may be coming out, whether the stock is temporarily overbought or oversold, and other information that is generally focused more on the short-term price of the stock and less on the long-term prospects of the company.
Is Swing Trading suitable for options trading?
Yes, options can work quite well for swing trading because they give you a lot of leverage, and so you don’t need nearly as much capital as you would need to do the same trade just buying 100 shares of stock.
There are two drawbacks to using options for swing trading:
1. Time decay causes your option to lose value everyday you’re in a trade.
2. It can be more difficult to figure out the stops and target price for your option if you’re trying to exit at price targets on the stock. For example, if you’re trading SPY and you want to have your first take profit at 270, what price will your option be when SPY hits 270? To resolve that problem, many options traders will have there first profit target at a 50% increase in the value of their option, or something similar.