What is the difference between a trade and an investment?

"There is a difference between a trade and an investment?!?!?  WOW!"

In the future I am going to post about the ten commandments of trading and rules for investing.  Before I get started describing those rules and strategies I figured that it would be a good idea to explain the difference between a trade and an investment.  There is a HUGE difference after all!

An investment is when you purchase something with the expectation that its value will increase in the future.  People invest in stocks all the time, but people also invest in their homes, collectables, bonds and a miriad of other investments.  An investment should grow in value over time as it matures.  If you are going to invest in a stock or multiple stocks please make sure that you feel it is the stock of a strong company that is profitable in the near term and long term future.

A stock trade is different than a stock investment.  A trade is when you buy a stock because you believe that there will be a catalyst or event that effects the stocks price that is going to take place in the near future.  This catalyst will drive the stock's price higher allowing you to sell the stock for a trade profit.  It is very important to understand the catalyst for a trade.  The catalyst is the reason that you think the stock will go higher in the near term.  Examples of catalysts are legal rulings, election results, quarterly earnings reports and any other event that will move a stock's price. 

Here is a basic example.  You may decide to trade Lowes stock because you have noticed a large increase in business at Lowes in your area.  You may ask some family that you have in a different area of the country if they have noticed a lot of people in their area frequenting Lowes also.  Plus you see a story on the news reporting that a lot of people are doing home repairs.  So you may feel that Lowes will have great quarterly earnings that beat Wall Street Analyst expectations.  In that case you could execute a trade by purchasing Lowes stock before their next quarterly report with the expectation that when they beat their earnings estimate their stock price will rise dramatically.  In this case the catalyst for the trade is the release of the quarterly report.

All trades need to have a catalyst.  Because trades have specific catalysts the stock involved does not necessarily have to have great fundamentals or long term future profitability like a stock you would invest in for the long term.  Because of this it is important to not let trades turn into investments.  Remember a trade and an investment are two very different things.