Trading vs Investing
Investing and trading are the two genres of the field of creating wealth in financial markets. However, investing and trading are very different approaches to wealth creation or generating profits in the financial market. Although both trading and investing focus on the same goal which is to make a profit, they have some major differences that are discussed in this article. Follow to learn more about trading vs investing.
Definition of investing
The act of investing is to gradually make a profit over an extended period of time in any financial market. It works based on buying and holding a portfolio of different financial assets and investment instruments. Investors would often hold the asset for a long period of time, sometimes even as long as years or decades, in order to take advantage of price movements and interests. When investing you ignore markets inevitable fluctuations with the expectation that prices will rebound and any losses eventually will be recovered after a long period of time. Making investing decisions is typically more associated with the market fundamentals and basic factors that may cause significant movements in the price of an asset. Generally, there are two styles of investment including passive and active investing. Passive investing involves focusing on long term returns and is not concerned with the shorter-term movements of an underlying asset caused by different market conditions. Active investing is a style that many individuals will choose to use with the aim to beat the average returns of the market. Active investors would often go through a lot of fundamental and technical analysis to identify the potential points of buying and selling assets.
Definition of trading
Trading involves more frequent transactions and entering and exiting positions with the aim of making profits out of market movements. Trading is the act of buying and selling financial assets such as stocks, commodities, currency pairs, etc. The major goal of trading is to generate returns that outperform investing by buying and holding the asset. Traders would often focus on finding profitable entry points and seek to make profits within a specified period of time. They use a protective stop-loss order to automatically close out losing positions at a predetermined price level and take profit order to close their positions to avoid losing profits. The basic tool of trading is technical analysis and its indicators such as moving averages and stochastic oscillators. Technical trading refers to finding high-probability trading entry and taking positions based on technical indicators signals. Traders are divided into four general categories including position Traders that hold their Positions for a period of months to years, Swing Traders that hold their Positions for a period of days to weeks, Day Trader that hold their positions throughout the day with no overnight positions, and Scalp Traders that hold their positions for seconds to minutes with no overnight positions. Choosing the trading style depends on the trader’s characteristics, trading plan, and goals in the market.
Trading vs investing
As mentioned earlier, both trading and investing involve making a profit in the financial markets, but they pursue this goal in different ways.
Trading vs investing: Period and timeframe
Trading is a method of holding financial assets for a short period of time. The trading time frame can be as short as seconds and at most as long as weeks. A trader holds the asset for the short term and makes a profit out of frequent market fluctuations while investing is the act of buying and holding for a long period of time while ignoring the small market fluctuations and focusing on long term returns. Some investors may invest their capital on an asset for some years, decades, or for an even longer period.
Trading vs investing: Potential risks
There is no doubt that both trading and investing are involved with the potential risk of losing initial capital. However, there are higher risks and higher potential returns associated with trading rather than investing as the price might go high or low in a short period of time in the market. Investing is an art and it is complicated. That is why it may take a while to develop and be able to make profitable decisions. As investing involves lower risk and the returns are lower as well. However, there might be higher returns by compounding interests and dividends in a long period of time.
Trading vs investing: Capital growth
Generally, traders focus on the price movement of the financial assets in the market rather than waiting for long term profits. If the price goes higher, traders may sell the asset but investors may hold for higher prices. Simply, trading is the skill of timing the market and predicting short term fluctuations while investing is the art of creating wealth by compounding interest and dividend over a long period of time and investing in quality stocks in the market.
Trading or investing?
Answering the question of whether you should choose trading or investing is up to yourself. You are the only one that can know for sure if trading is the thing for you or investing. First of all, you need to think about the time you can devote to each of these activities. In case you are able to spend hours analyzing and monitoring charts and graphs every day then trading would be a good choice for you. But if you cannot, long term investing suits your condition.
Then you need to consider the size of your investment. If you are a small investor and your goal is to grow your capital you would be better suited for long term investments but in case you are a large investor with the goal of short term trading and making quick profits then you should plan to go through trading. Keep in mind that the amount of research and analysis that is involved in trading is much more extensive in compare with investing. A lot of hard work and technical knowledge is needed for analyzing the market conditions and predict future movements. So in case, you enjoy putting in energy and doing the technical and fundamental analysis religiously should consider trading rather than investing.
Finally, to conclude trading vs investing discussion it can be said that both investing and trading are methods of attempting to profit in the financial markets by buying and selling assets. Both investors and traders are looking for making profits through market participation. The main difference between investors and traders is that investors focus on larger returns over a long period of time through buying and holding. This is while traders would take advantage of rising and falling markets to enter and exit short and long positions over a shorter timeframe, with the aim of making smaller, but frequent profits. Traders enter and exit the market within weeks, days, even minutes, and make short-term profits. They often focus on technical factors rather than on fundamentals and long-term prospects. What matters to traders is which direction the market price will move next and how the trader can take a position to make a profit from that movement. Investors on the other hand have longer-term goals and hold assets regardless of the market’s ups and downs. As a person who tends to enter financial markets and make money out of it, it is up to you to decide if trading and making a smaller profit in a short time is your goal or holding on and sell at a much higher price, in the long run, is more suitable based on your characteristic.