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Investing vs. Trading

Investing vs. Trading. Wait For It.

For those that follow the stock market, and the activity therein (or have a general awareness of what’s going on in the world) you might have heard of some funky stuff happening recently around GameStop, Bitcoin, Legally Mistofferums, and more.  Big shifts have been happening around strange circumstances, and so I figured it was time to do a post about investing vs trading.

The stock market can feel like a very scary place until you start to understand the basic components that make it tick and run.  So, we’re going back to basics.  We can always use a brush up.

It’s very important to understand the simple power of long-term investing, and the good impact it can have on your life.  Let’s dive in.  

The Sea of Stocks

Here’s the story of a young woman. Little Inez is now 28 years old.  Let that sink in.  (She might not be exactly 28, but for the purposes of today, why not).  She’s doing pretty well for herself, she’s a manager at the local record store.  She makes $65,000 /year, (which is really about $43,500 after taxes) and she spends about $35,000 when all her bills are paid.  She’s left with $8,500 surplus.

Little Inez feels like she’s ready to start buying stocks.  But is she going to invest or trade?  The honest answer- she probably doesn’t know the difference yet.

Little Inez downloads the Robinhood app (like her brother Seaweed told her to!) and stares a bit blankly at the homepage.

She sees a search bar and thinks for a minute.  What should I invest in?  What do I like?

She buys 1 share of Starbucks with a big grin on her face.

Woah, woah, woah wait- we’ve already come to a stopping point in the story.

What is a share/stock actually?

Investing vs. Trading

A stock is a share of the company.  You buy a share, and you own part of that company. Seriously!

In exchange the company takes your capital (money), and can use it for business operations as they see fit.

But you can sell your share back to the company for whatever it is worth at the time you decide to sell.

There are online institutions that make buying, holding, or selling stocks very easily.  You can easily open a “Brokerage Trading Account” with Vanguard, Fidelity, Charles Schwalb.  Find your way to any of those and you’ll be in good shape.  Yes, you can look into Robinhood on your phone, but we’ll chat a little bit about why Robinhood users tend to live in trading, and we want to be investing.

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So Little Inez has her 1 share of Starbucks!  Valued at $106.26 at the end of the day.  She’s thrilled.  She can’t wait to see what her little stock does the next day.

Next morning, the market opens at 9:30am, and Little Inez is eagerly watching with coffee in cardboard cup in hand.  9:35am, Starbucks goes DOWN from $106.26 to $98.26 and in the process Little Inez panics and sells her 1 share of Starbucks.  Maybe she thinks that was a bad idea.  She lost $8 in 5 minutes.  Shoot man.

Later that day around 4pm, curious to know what ever happened to her cruel Starbucks, Little Inez tunes in again to see what happened that day.  To her shock it had gone back up, way up to $109.26.  She would have made $3 that day for doing nothing if she just waited until the end of the day.

Invest, We’re So Much Better Than Before!

This is why we value investing vs. trading.

Trading is all impulse, and it’s statistically cited that long-term investments into mutual funds and ETFs is the clearest way to achieve wealth through the power and growth of compound interest. (Remember Patti LuPone’s investing strategy?).

Little Inez was just trading a stock that day.  She bought 1 share, panicked, and sold it.  That’s not going to get us very far in building a financial bedrock for the future, and for your life goals.  

So, Little Inez studies up and she stumbles upon a neat financial blog aimed directly at speaking to different theatrical and entertainment populations, Creative Finance with Broadway Joe.  Maybe you’ve heard of it?  

She learns the power of index funds, she studies up on compound interest, and understands why it’s important to harness the power of investing vs. trading.  She is ready to get back in the game.

She goes back to her Robinhood app, and this time buys 1 share of VTI (the Vanguard Total Stock Market ETF).  She also sets a recurring order to buy 1 more share, once a month.  She doesn’t look at it much at all, she doesn’t need to, because she’s investing vs trading.

Investing vs. Trading

But that money will also be available to her if she needs it.  Let’s say she’s ready to buy a house, and she wants to sell some of her investments to help pay for it.  Totally possible, and easy.

But Little Inez has one more lesson to learn: taxes.

But it’s very simple, I promise.  Short-term capital gains and long-term capital gains.

Why didn’t Prof Dillamond, teach us this sh*t at Shiz?!

Basically, here’s the deal, when you sell stocks, you pay taxes on the money you made from that stock. And when you sell any stocks you haven’t had for longer than a year, you pay short-term capital gains tax on the money you made.  Short-term capital gains tax is higher than long-term, because long-term capital gains tax is meant to incentivize you to hold your stocks for longer

It does get more complicated than that, but that’s the very basic gist.  You hold your stocks for less than a year before you sell them, you will pay more in taxes on the money you make from those stocks.

Therefore, in investing vs. trading, you want to hold your stocks for a long time, a really long time (days and days and days…. that’s how it happens), and you’ll pay less tax on the money you make from your investing. (And nothing on your gains if you’re investing long term in a Roth IRA!).  

So Little Inez starts investing more and more into these index funds, thinking ahead to her future.  

Finale Thoughts

I think a lot of people who don’t understand the stock market see it as gambling, and it certainly is.  But we know the constant- the market continues to go up, it always has.  It reflects business, and people, and innovation, and science- it is the monetary pulse of a modern society.  So invest in that.  Invest in going up over the years with broad market exposure.

There will be times to adjust and pivot some things along the way, but by just getting started you’ll put yourself on a path to success.  

(And if you want to buy $10 of Dogecoin just to say you have some, I’m not going to tell anyone- Delta Nu Nu Nu)

It’s still important to have a properly funded Emergency Fund before you get started investing, you need to be able to take care of yourself in a sticky situation- and there will be times in investing where the markets are down and we’re just waiting out the recovery.  

I hope the core concept makes sense and sticks with you if nothing else.  Investing vs. trading.  We want to be investing, for the long term.  I highly encourage you, to wait for it.


I hope you enjoyed today’s post relearning the basics of stocks and long-term investing! Have a thought about what you read? Drop a comment below!

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