Thursday, August 13, 2009

Trading or Investing?

Someone recently asked me about trading as a source of income as opposed to having a regular job. In a word, no. There may be people who operate this way, but I doubt there are very many. Trading is necessarily going to entail ups and downs in your capital so you can't count on it to produce the rent money for next month. It is much more like investing in the stock market or real estate or owning a business. There are going to be periods in these types of enterprise where you make little or no money or actually lose money. Not so much the case with business, but if you talk to anyone who has started their own business they will probably tell you that it took them some time to make it profitable and most business startups eventually fail. Trading in stock index futures or any other type of market is much more like investing in the stock market. You are going to experience significant periods of time where the investment does not perform and cannot be counted on for short term expenses. Just think about what the Dow Jones Average has done the past twenty years. It has been all over the map, so there is no way you could plan on having that money back to use in the short term. So, when you think about trading remember to treat it like investing in higher risk entities like stocks and real estate, and not like the income you would make from a job or a simple interest bearing account in a bank.

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