Investing vs. trading is an essential conversation for everyone who wants to understand the financial markets. Although both terms are often used interchangeably, investing and trading are two very different approaches to making profits in the financial markets. Investors look for larger returns by buying and holding assets for a longer period. Traders, on the other, take advantage of short-term fluctuations for relatively smaller and more frequent profits. Generally, the main goal of investing is to build wealth over the long term. In contrast, the purpose of trading is to generate short-term profits.
Investing vs Trading Explained
The all-time confusion between the terms investing and trading is essential to be cleared. Investing vs. trading can be confusing for many people, however, there are many differences between both terms as each indicates a different approach to money-making.
Investing is the process of buying financial instruments, maybe across different markets, for the sake of income generation, or capital growth. It requires a long-term market view and takes time. Investors may keep their positions for years, or even decades as they are more focused on long-term growth. The stock market and real estate are two of the most traditional markets for investments.
Trading, conversely, is more based on price speculation and is a short-term approach for generating profits. Traders seek to profit from short-term price changes affected by financial and economic factors creating attractive trading opportunities for a shorter time horizon. The forex market is more convenient for short-term trading.
Neither of these methods is necessarily better or worse than the other, it depends on your level of market expertise, goals, and the time you dedicate to the market.
You might be asking yourself “Am I a trader or investor?” “How do I know which one is better?” To answer these questions about investing vs. trading, let’s take a look at three main factors:
A trader keeps an eye on short-term price movements, deciding when to get in and out of the market with maximum profits. By doing this over and over, a trader generates smaller and more frequent gains.
An investor is more concerned with larger profits, by holding assets for longer. The time horizon for investing is considerably longer than that of trading. Investors may buy a stock and hold it indefinitely with no time-based plans to sell. Similar to traders, investors use analytical means to determine when to enter an investment. But unlike traders, they typically have no plan to exit the market at a particular price. Hence, price fluctuations are acceptable. Investors tend to engage with market movements less frequently than traders, and often don’t engage unless they want to expand their portfolio.
A trader is actively involved in the market by analyzing price charts and other signals to know when to enter and exit the market. Reading charts to figure out buying and selling levels is known as technical analysis. On the other side, an investor focuses on the larger picture. For example, a stock trader buys stocks only for selling them at a higher price. While an investor holds the stock with the expectations that it’ll grow in value and doesn’t intend to sell the stock even during the bad times of the market.
For traders, short-term market risks can have a greater effect on their trades which requires more monitoring and frequent interference. Traders often use take-profit and stop-loss orders to help calculate the probability of success.
Meanwhile, investors are not bothered by daily market fluctuations as long as the long-term trend is intact. Risk management for investing heavily depends on portfolio diversification, by dividing investments across different securities and asset classes.
What is Investing?
Generally speaking, investing is a longer-term buy-and-hold strategy geared towards growing and managing wealth. Investment involves holding assets for very long periods with the purpose of generating profits from rising asset prices over time.
Investments are held for years, and maybe even for decades, for perks like interest and dividends over the years. Investors don’t pay much attention to short-term market downtrends with the expectation that prices will ultimately rebound and any losses will be recovered eventually. So, they are more focused on market fundamentals.
The risk-return tradeoff is key to investments. There is the main concept of investing is that the higher the potential return of an investment, the riskier the investment is. For investors, long-term risks are more important than those for the short-term.
The time horizon for investments usually depends on financial objectives. The longer the time horizon, the higher growth as well as risk. However, this enables them to ride out market volatility. A shorter time horizon requires more conservative investment choices, otherwise, the risk of missing financial goals can be greater.
Typically, investors feel more comfortable with the idea that financial markets rise and fall. As they are looking for long-term results, they often disallow periods of underperformance from affecting their perspective that asset prices will eventually rebound and recover short-term losses.
Nonetheless, there are two styles of investments; active and passive. Active investing involves frequent trading with the goal of beating average index returns, focuses on individual securities, and requires in-depth analysis and market expertise to determine the best time to buy or sell. Passive investing, on other hand, is focused on buying and holding assets through ups and downs with a long-term return in mind.
What is Trading?
In contrast to investing, trading is a more active short-term strategy as traders hold assets for a much shorter period of time which can be weeks, days, or hours. Buying and selling with the aim of profiting from short-term price movements.
In trading, profiting from both rising and falling asset prices is possible. Instead of assessing the long-term prospects, traders try to figure out the next direction of the price and trade accordingly.
Traders use stop-loss orders to automatically close out losing trades at a predetermined price level and protect their trading capital compared to investors who often ride out periods of underperformance.
Generally, trading requires more market engagement, time commitment, and constant monitoring of market changes.
The types of trading strategies are:
- Scalping: This strategy is for traders who prefer short-term, or those who like to seize instant price movements. Scalping strategy focuses on accumulating small but frequent profits in a considerably short time.
- Day Trading: It includes holding trades during a particular trading session, and no trades are kept overnight. Traders close all trades by the end of each day which typically reduces exposure to market movements Although it is applicable in all markets, the day trading strategy is mostly used in forex trading.
- Position Trading: Unlike scalping and day trading strategies, the Position trading strategy is primarily focused on fundamental factors and overall price trend. This strategy does not consider minor market fluctuations as they won’t affect the broader market trend.
- Swing Trading: This one is for traders who prefer a mid-term trading style where positions can be held only for several days. It is based on the idea of making a profit out of changes in price, by identifying the swing highs and swing lows in a trend.
What is Online Trading?
Online trading is executing trades over the internet by buying or selling financial securities, usually through an online broker. Using an internet-based trading platform, traders directly buy and sell financial instruments.
Today, you can trade stocks, forex, cryptocurrencies, ETFs, bonds, and commodities right from the comfort of your couch. A process that has been made easier by eliminating the complicated paperwork thanks to fintech and forex technology innovations. All you need is to set up a trading account and you’re ready to go.
Based on your funds, financial goals, and risk tolerance, you can choose the time horizon for your investments. It can be short-term, medium-term, or long-term. Hers are some tips for making money from online trading.
Investing vs. Trading: Key Differences
Although investing vs. trading might be involved in explaining the financial markets, the comparison requires explaining the two different activities, with different goals. Thus, investing vs. trading comparisons might be somehow confusing. So, let’s explain here the key differences.
The stock market is considered to be the main destination for investments. Stocks represent ownership in a company and can be great for growing your wealth over time. The stock market has delivered generous returns to investors over the years compared to other investments. By investing in stocks, you own a part of the company. As the company grows, the stock will deliver higher returns.
Investors usually pick individual stocks to invest in, or through ETFs. To lowering portfolio risks, investors tend to invest in other assets as well, including commodities such as oil and gold. Overall, they go for less volatile assets that promise steady returns in the long run.
Traders, on the contrary, prefer more volatile assets so that they can benefit from price changes. Unlike investors, traders speculate on the price of the asset without owning the asset itself, which is known as CFD trading. Contracts for the difference is a financial derivative through which traders can speculate on short-term price movements in the financial markets including forex, shares, commodities, and indices without having to buy any underlying assets.
Contracts for the difference are a form of derivative trading, which means they derive their value from the market performance of the asset. The value of a CFD contract does not reflect the value of the asset, only enables traders to profit from price changes.
Traders are more attracted to markets that allow for two-direction trading, which offers the ability to profit from rising and falling prices. For instance, forex trading and CFDs enable traders to buy or sell and make profits either way.
Stock trading is now easier than ever, get an edge in the stock market and to seamlessly diversify your investment portfolio with AximTrade.
Another distinguishing feature between investment and trading is how markets are analyzed and researched for trading opportunities. While investors typically focus on fundamental analysis, traders learn more about technical analysis.
Fundamental analysis is based on evaluating the price of an asset and assessing the factors that could influence its value in the future, including external influences.
Technical analysis is based on the study of historical price action in order to identify price patterns and predict future movements through the use of technical indicators and historic price patterns. The main tool for technical analysis is the price chart through which traders interpret price patterns. Check our Beginner’s Guide to Technical Analysis.
Investment is all about growing your own wealth through accumulating long-term returns. But trading can generate profits in the shorter term. Based on your objectives, you can decide which suits you the best.
You can be both an investor and a trader by diversifying your portfolio by investing in stocks, bonds, ETFs, and commodities while trading in other markets like the forex for sooner returns.
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