Investing vs Trading

Fundamental Analysis (FA) and Technical Analysis (TA)

Fundamental Analysis is when you do your research based on company and industry analysis.


Technical Analysis is when you invest based on technical charts and price action.


Some use investing and trading interchangeably, but there is a distinct difference. Investing is taking calculated risks according to your risk profile. Trading is buying and selling stocks to capitalize on daily price fluctuations. The differences lie in the time horizon and the amount of risk you are taking on.


When you invest you are buying a piece of a business/company. You are an owner. If you own a business, you focus on the business. Things like Revenue, Profits, Assets, Debt are what you focus on. You do not own a business and daily sit and think about the value of the business and what someone is willing to pay you in order to buy your business. When you’re buying shares of a business, the stock price is important. Once you own those shares, you own a piece of the business, and unless you’re planning to sell, the stock price is irrelevant.


Trading is very different to investing. When you trade, you need to focus on price action. You own shares for a short period. When the price hits a certain level, traders sell their shares.


Swing Trading

Swing traders in essence work off the premise that the market overreacts and always goes back to normal. They take advantage of that fact. The share price and the perceived value of the company do not match at a specific time.


Think of March 2020, when the stock market plummeted because of the pandemic. It was the perfect opportunity to swing trade. Almost all stocks dropped significantly. The Sasol share price dropped from R310 down to R25. The world went into Lockdown, and nobody needed oil. Investors knew that there is nothing wrong with the company. R25 was a gross overreaction to the impact of the pandemic on Sasol. The world will open up again. Many, including myself, entered swing trades on Sasol. I bought 4000 shares down at R25. At R170, I sold 3000 of those shares and still hold the last 1000. Here I was swing trading on a company I invest in. You do not have to be one or the other. You can combine strategies.


I enter a few swing trades per year and normally stay in each trade for 6-8 weeks. Some even as long as 3 months. I trade off technical analysis. When the market overreacts and I determine that the stock is undervalued, I will enter a swing trade. Not all swing trades end well. I do not recommend swing trading for novice investors. You need to be able to read technical charts if this is something you want to do. The risk with swing trading is higher than with investing.


Day Trading

As the name suggests, day trading is when you buy and sell stocks every day based on technical charts alone. You do not consider the fundamentals or the value of the company.


Day traders study technical charts and “bet” on the odds. Day trading gambling requires immense skill and hard work. Unlike going to a casino and betting on either red or black, day traders use charts to analyze what a share price will do based on historical price movements.


As you become more comfortable in the market you can opt to combine strategies.