CNBC's Jim Cramer said it's important to understand that a trade is not the same as an investment.
Trades are made with short-term goals in mind, while investments are about gains in the long term, he said.
According to Cramer, investors make trades based on a specific catalyst, or some future event they think might drive a stock higher, like anticipated news about a drug company's product receiving FDA approval. He emphasized that trades have a limited shelf life.
Regardless of whether investors predict the outcome of a catalyst successfully, they should be prepared to sell when the moment has passed, he added.
"Hopefully, you'll turn out to be right about the catalyst and you'll rack up a nice gain. If that happens, no point in sticking around, ring the register and lock in your profits before they evaporate," he said. "But if you turn out to be wrong, well, guess what: you still need to sell."
When making an investment, Cramer said investors should have a thesis about how the stock will perform well over an extended period of time. However, he stressed that it's important to continue to research an investment to make sure the thesis holds up.
"Not all Wall Street gibberish is deceptively complicated. Some of it's deceptively simple, like the distinction between a trade and an investment," Cramer said. "Remember that they're not the same, and it's a big mistake to turn a trade based on a catalyst, whether it's successful or unsuccessful, into an investment, which is a long-term bet on the future of the business."
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