Trading vs. Investing: The Big Mistake

Long-Term Investing: What Not to Do

Mad Money host Jim Cramer reveals long-term investing strategies. Making money in the long-term has become the alibi for short-term losses, he explains.

When people talk about stocks, they often kick around the terms trading and investing as if the were interchangeable.

But they're not. Although the difference is small the impact can be enormous.

And that begs the question - what's the difference?

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"The widely accepted difference between trading and investing has to do with your time horizon," said Jim Cramer.

That is, the length of time you intend to hold a stock after you buy it.

Remember, as Cramer so often says, you don't really have any profits at all until you sell. Therefore having a 'sell' strategy - that is, knowing when you'd like to ring the register is absolutely critical.

Now here's the important part.

Traders intend to ring the register somewhat soon - at least relatively. "Trades are positions you hold for a shorter period of time," Cramer said, "that's largely anywhere from hours to a few months."

Playing stocks for an earnings pop is an example of a trade.

Conversely, investors intend to ring the register somewhat later.

"Investments are positions that you hold for a longer time," said the Mad Money host. When Cramer says an investment he means a position that you hold for a year or more.

Buying Facebook as a bet that the company will dominate mobile in the years ahead is an example of an investment.

Now there's an important caveat

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Cramer doesn't want anyone to think long-term investing is synonymous with buy and hold.

It's not.

"The idea behind buy and hold is that once you purchase your stocks, you just wait," Cramer explained.

You must never do that.

Cramer says it's critically important to become actively involved with your investments, monitoring earnings reports, government documents and newspaper reports - something he calls homework.

That's the path to success, he says. Read More: How to Get a Leg Up on Pros

Whether you're an investor or a trader you must always be active; evaluating and then re-evaluating your positions regularly. And then, when you think the time is right - sell.

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