Small Cap Trading vs. Small Cap Investing

Recently I was reading an article that kept interchanging trading and investing like they were the same thing. In the context of the article, they weren’t. It got me thinking that not everyone knows the distinction, so I thought I’d go over the difference with you.

Here’s one of the main problems. The terms are being used to classify people and that’s not really what they are meant to do. Instead, small caps trading and small caps investing classify an action. You can be both a trader and an investor at the same time. Perhaps you’re more one than the other.

Of course context is important. Technically, when you buy stock, you make a “trade,” so the term trading could apply even though you might plan to own that stock for a very long time.

But in reality, we’re talking about what you plan to do with the stocks.

Small Cap Trading & Small Cap Traders

As actions go, when you’re interested in trading a stock, you don’t care about the company’s long-term potential. Depending on your own guidelines, you might not even care about the fundamentals.

When you buy a stock for trading purposes, you’re only going to hold it for minutes, hours or maybe days. Traders make money in the stock market through volatility. You know, that thing some people think is bad.

Here’s the basic concept. During the course of a day a “good” stock will go up or down. As a trader you want to:

Make money continuously as the stock goes up and down during a time period. An example would be buying AK Steel Holding Corporation (AKS) at 11 a.m. for $14 per share and selling at noon for $15.75 per share. The stock comes back down and you buy it again and hold it for an hour and sell it again.
Make money one-time off swings (up or down). An example might be buying 99 Cents Only Stores (NDN) because you see there’s momentum building and you ride the wave as far as you’d like then you dump the stock.

The main takeaway here is that trading stocks isn’t about looking for the next Starbucks or holding on to stocks for a long period of time. Most stock traders hold their positions for minutes to hours and almost never overnight. However, some traders are willing to hold their position for days waiting for their swing to happen.

Small Cap Investing & Small Cap Investors

When you buy a stock and plan to hold it for awhile, you’re going “long” and you’re investing.

Investors typically look at all sorts of data (fundamentals, etc) because they plan to be in the stock for a long time (many months to many years). When you invest, you look at all of this data, because it’s going to play itself out in the stock you own.

I typically look at investing three different ways:

You’re looking for the next Wal-mart (or insert whatever missed mega-opportunity you’d like here). Personally, I think this is a waste of time, because the “pool of realistic players” is small and it’s easy to miss.
You’re looking for a company you can ride with over the course of years. You hope the company will continue to grow. An example would be investing in Apple. Yes, I know Apple isn’t a small cap stock, but I’m an Apple guy.
Lastly, you’re investing for an upswing over the course of a month to a year. This is the category I fall into when I invest. Very rarely have I invested into a company for an extremely long period of time. An example here would be buying California Pizza Kitchen, Inc. (CPKI) back in February 2010 when it was around $13 per share and selling it in May when it was at $20. You invested in the company for a few months and decided to take your profit of 65%. That’s another thing. Sometimes investors will take back some profit, but keep running with the stock.

Bottom Line

You can be both a small cap stocks trader and investor at the same time. Perhaps you lean more one way than another. Personally, I lean towards being a trader because that’s how I got started and what I enjoy most.

I will invest from time to time though. But it’s hard for me, because I know how to profit off of the swings, so I just view it as money lost if I’m on the sideline watching my “investment.”

There’s no right or wrong way though. Some people are more cut out to be investors and some are better at trading.

Leave me a comment. I tried to make this an easy-to-read basic article about the differences. Newer investors tend to get confused and many give up and/or lose money because of it. I hope this article helped you.