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The Difference Between Investing & Trading

“Not all Wall Street gibberish is deceptively complicated,” said Jim Cramer on CNBC's "Mad Money." “Some of it is deceptively simple.”

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Case in point: The idea of investing versus trading.

(RELATED: Cramer's Top Dividend Stocks)

A lot of people use the terms interchangeably, but they shouldn’t. At least on "Mad Money," they carry very different meanings. An investment is based on a long-term thesis, while a trade is any stock purchase made to profit from a short-term catalyst. Mixing up the two can cause some serious damage to your portfolio.

Only buy a stock as a trade when you know there’s some future event that could drive its stock price higher. Maybe, if we’re talking about a pharmaceutical company or a biotech, it’s the release of positive clinical trial data. Whatever the catalyst, though, the strategy is to game that news and, hopefully, take profits after. But even if the plan doesn’t pan out and you lose money, Cramer said, you must take profits once the catalyst has past. The biggest mistake you can make is to turn a trade into an investment.

On the investing side, you might see some short-term declines, but that’s OK. The goal here is to bank profits over the longer term. So those dips are just a chance to buy more of the stock in question, provided you still believe in the thesis that brought you to it in the first place. And if the stock should rise in price, don’t take your money and run. Should your thesis hold true, there will be still more good news ahead for the company.

(Written by Tom Brennan; Edited by Drew Sandholm)

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