The Difference Between Investing and Trading. All You Need to Know Before Starting
Tesla stock on an iPhone
In the past few years, numerous online investment and trading platforms have popped up, resulting in more people becoming privy to investing and trading of various asset classes. The internet has significantly facilitated the growth of online trading, and smartphones have helped to expand it even further. Today, you’ll likely see numerous trading applications exist on Google Play Store and Apple App Store.
As more people get into trading various asset classes online, there’s a growing need to help distinguish between investing and trading. You’ll often hear people use these terms interchangeably, thinking they mean the same thing. However, numerous differences exist between trading and investing. Whether you’re trading or investing in stocks, cryptocurrencies, forex, commodities, or anything else, you have to understand that investing and trading are two very different approaches to financial instruments.
Before proceeding further, we must point where the similarities between the two ends. Investors and traders have a similar goal: to profit from financial instruments. Ultimately, they want to see sizable returns on their capital, rightly so because no one trades or invests asset classes intending to lose money. However, the distinction is in how they approach their goal.
What is Investing?
Typically, investing refers to long-term strategies for financial instruments. Unlike traders, investors aren’t looking to hold positions for a short while. Instead, they’re looking to build a portfolio over time that can provide sizable returns and help them grow their wealth. As a result, most investment strategies usually span an incredibly long time, ranging from years to decades.
Most investors aim to increase their wealth by seeing their financial instrument’s value increase. Stock investors will often opt for dividend-paying stocks and stock splits because they guarantee a healthy passive income stream. Investors are also less likely to cash out during market downturns or when speculation is rife because they’ve invested for the long term. They usually believe the prices will return to normalcy over time and, as a result, determine their assets aren’t worth selling out of panick.
Most investors focus on assessing market fundamentals when investing in an asset class. Hence, they’re more focused on metrics that show annual growth instead of assessing their asset’s daily performance.
Two investors researching assets
What is Trading?
Trading significantly differs from investing. That’s because it focuses more on short-term gains instead of long-term gains. Whether you’re a stock, crypto, forex, or commodities trader, you’ll likely be making numerous daily or weekly transactions. As a result, your approach differs significantly from investors who only invest in assets when they see a potential long-term growth opportunity. Traders hope to outpace investors’ returns by making more transactions and capitalizing on market fluctuations.
Numerous factors – both internal and external – can impact financial markets, resulting in asset prices falling or rising. Since most financial markets can be volatile, traders aim to take advantage of the volatility for their benefit.
To illustrate, let’s assume you’re a stock trader. You receive news that Apple will be releasing its annual financial report soon. You’re aware that Apple has sold more units this year than ever before, and as a result, you expect the company’s stock to appreciate. You purchase some Apple stock for $170 immediately. Once Apple officially releases its annual financial statement, the market reacts by purchasing more stock because they’re impressed with Apple’s revenue and profitability. As a result, Apple’s stock price increased to $180. Since you already purchased the stock before the financial statement’s release, you managed to make a $10 profit per owned share. As a trader, you can now sell your Apple stock to other traders or investors, generating a sizable investment return.
Generally, traders hold positions for a few hours, days, and in some rare instances, months. Your trade holding duration will depend on your trading philosophy. Typically, four types of traders exist scalpers, day traders, swing traders, and position traders.
Scalpers are notorious for making dozens, if not hundreds, of daily trades. They usually don’t hold a position longer than a few seconds or minutes. Their profit per trade is minuscule, but they make up for it through trade quantity. Scalpers don’t hold positions overnight because they want to avoid overnight risk exposure and fees.
Day traders operate similarly to scalpers, except they’re likelier to hold their positions from the start of the trading day until the market closes. Like scalpers, day traders also refrain from holding positions overnight to avoid risk and associated fees.
Swing traders generally hold positions for longer than day traders and scalpers. It’s not uncommon for swing traders to hold their position for a few weeks. They try to benefit from the market’s momentum-swinging. Position traders generally like to hold positions for even longer, ranging from months to years.
Investment written in block tiles
Differentiating Between Investing and Trading
Here are some crucial distinctions between investing and trading that you’ll want to remember. They include:
Asset Analysis
Traders and investors need to research before placing their capital in an asset. Otherwise, they risk losing their money by making ill-advised decisions. However, the difference between traders and investors is how they analyze assets. Traders generally look at metrics that help them understand an asset’s daily performance, enabling them to predict short-term future trends. Hence, you’ll see traders using technical analysis tools to assess an asset before trading it.
On the flip side, investors focus on an assets’ long-term growth and potential. Therefore, using technical analysis isn’t enough, and as a result, they’ll rely on fundamental analysis to assess long-term viability metrics.
Risk and Reward
Traders and investors also have different approaches to risk and reward. Investors are generally risk-averse and prefer investing in assets that will yield profits in the long run. They’re satisfied with making decent but not overwhelming profits, so long as they’re safe from eccentric market volatility in the long run..
On the flip side, traders like to capitalize on market fluctuations, and as a result, they’re dealing with higher risk regularly. However, by doing so, they’re also likelier to incur greater profits because if they anticipate market trends correctly, they can make sizable profits. However, one wrong decision can also cause them to incur significant losses.
A trader performing market assessment
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Visit our website today for more information. Alternatively, consider registering an account with us to get started.