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The Difference Between Trading and Investing

Some assets—stuff you own that generates income—are better vehicles for investing; others fare better in trading, while a few can both be traded and invested at the same time.

Investing and trading are closely related terms. Knowing the difference is key to positioning yourself to a better advantage.

Just the Nuggets

  • Investing is putting something of value to an asset today in exchange for higher returns in the future. Investors capitalize on longer time horizons.
  • There are two types of investing: passive investing and active investing.
  • Trading is the act of buying and selling assets frequently. Traders capitalize on market volatility—the ever-present price fluctuations in the market.
  • Traders can be categorized as market timers, sentimental traders, and noise traders.
  • If you want to earn more, then you have to begin specializing in either trading or investing. Determining which one is better than the other depends on your strengths.

The Basics of Investing

Investing is putting something of value to an asset today in exchange for higher returns in the future. Like delayed gratification, you might feel like putting your money into unguaranteed assets is a sacrifice. But in investing, you are capitalizing on money and time—the longer you wait, the greater your returns would be.

Suitable assets for investing are bonds, index funds, mutual funds, stocks, and real estate.

Bonds

These are loans you give to government bodies or corporations for a fixed amount of time. On the maturity date, you’ll receive a guaranteed return of the initial amount you’ve invested plus the interest rate.

Stocks

These entitle shareholders to partial ownership and are issued by corporations as a way of raising capital.

Index Funds

These consist of stocks of large-to-mega-cap companies having a huge influence on or used as a benchmark for the general market trend.

Mutual Funds

These are pools of diversified funds, collected from several investors under the control of a fund manager, that may be invested in a mix of stocks and bonds. 

Real Estate

This includes properties like apartments, condominiums, building spaces, pieces of land, and many more. 

All of these assets may grow with time. Even if the market goes up and down now and then, investors are steadfast with their assets while they ride out the fluctuations. In the long run, letting your investments grow will build strong roots for a fail-proof financial foundation.

Types of Investing

Passive Investing

It’s the kind of investing that depends on the performance of an index. An index, like the S&P 500 and Dow Jones Industrial Average, is a group of large companies that are used to measure or benchmark market performance. Passive investors have little to no interest in outperforming the market. When the market is down, their investments also go down, and vice versa. 

Active Investing

If you want to be more hands-on with your assets, you can pick your stocks, for example. You may outperform the market, giving you more returns. But it’s also possible to underperform. If you’re going to choose a fund manager, go with someone who knows the fundamentals as well as the technical analysis to strategize the right time of buying and selling.

The Basics of Trading

Trading is the act of buying and selling assets. Now, you may think trading is a prerequisite to investing since to invest, you must buy the asset first then sell it eventually after a time horizon (e.g. 10 years). While this may sound logical—in the world of assets, however, people refer to trading when buying and selling happen frequently. Traders capitalize on market volatility—the ever-present price fluctuations in the market.

Suitable assets for trading are stocks, cryptocurrencies, forex instruments, and real estate.

Forex Instruments

Foreign exchange is the trading of money currencies around the world. The instruments could be options, futures, forwards, etc.

Cryptocurrency

This can be seen as a modern version of foreign exchange. It works like forex—only this time, the money is digital and outside any influence from governments or private entities. 

Stocks and real estate also work well with trading, aside from investing. 

For stocks, traders strategize the right time of buying and selling by looking at the price fluctuations in the market. For real estate, traders buy properties, increase their value (e.g. renovation), then sell them immediately. This process is called flipping, and it can occur in months.

Categories of Traders

Market Timers

With the use of technical analysis, market timers strategize the right time to buy or sell the asset for multiple gains. Some examples of market timers are:

  • scalp trader (trades assets in a matter of seconds or minutes)
  • day trader (trades assets within the market trading day; oftentimes, they don’t hold assets overnight)
  • swing trader (trades assets in a span of weeks or months)
  • position trader (trades assets after a few months or even a few years)

Sentiment Traders

Wherever the hype is, expect the sentiment traders to follow suit. Sentiment traders love to participate in the trend. As soon as the wave starts to build, they are in a haste to join the herd to ride the momentum.

Noise Trader

They usually hang out in social groups for traders. They lurk and stay vigilant for current events and how other traders would behave consequently. Most noise traders are impulsive beginners who will take anyone’s opinion into action. They can be as volatile as the stock market’s prices.

Strength Lies in the Difference

If you want to earn more, then you have to begin by choosing between trading and investing. People will more likely find their success when they channel all their focus to one particular endeavor. Specialization will help you build strength as you master the culture and rules of the potential learning ground.

KEY ASPECTS OF DIFFERENCETRADINGINVESTING
Time HorizonShort to mediumMedium to long
Dominant AnalysisTechnicalFundamental
StrategyBuy and sellBuy and hold
IndicatorPriceValue
Risk MeterRiskierRisky
Capital RequirementBig amounts are preferredCan start little
CostsTaxes and commissionsMinimal taxes and commissions
SkillsQuick and decisiveIn-depth research

Time Horizon

Trading allows traders to be as frequent as they can be in a matter of seconds to a few months. Day traders, for instance, seldom take their eyes away from their monitor screens, which may feel somewhat like gambling. 

This is opposite to investing, which requires a longer time in decades before they reap the rewards.

Dominant Analysis

Technical analysis is more fitting for traders because they have strategies that use statistical patterns to anticipate the projections based on price history. Every change in the chart is an opportunity for trading. 

On the other hand, fundamental analysis requires a closer look at the financial reports and other causalities (e.g. news and current events) that may influence the future growth of the assets.

Strategy

A trader takes advantage of market volatility, so their main strategy is to buy assets at a low price and sell them at a higher price. This happens quickly in volatile assets like stocks, forex instruments, and cryptocurrencies. 

An investor, on the other hand, takes advantage of the gradual appreciation. They buy stocks after careful analysis and hold them throughout the years until their planned time horizon.

Indicator

Value investing emphasizes the difference between price and value. Price is what everyone sees when they buy or sell an asset. Thus, traders are glued to the movement of prices. Because their time horizon is very short, they’re also quick to the chase. 

Investors look at the intrinsic value of an asset, like stocks for example. Finding undervalued stocks would give them a head start to an abundant growth in the coming years. However, the process involves a lot of steps like looking into financial ratios, in particular. 

Risk Meter

Both trading and investing are risky because no one could guarantee the future value of your assets. But between the two, trading is riskier because you can lose thousands of dollars in a day by waiting just a little bit longer than a second. Compared to investing, the risks are more manageable through careful studying.

Capital Requirement

Because of technology, investing is now more accessible for low-to-middle-income earners. You can start investing with as little as $1 in the stock market. It doesn’t matter how big you start because you have a long way to go anyway. Your focus is to grow your assets little by little.

But for trading, it will make more sense if you start with large amounts of money. For example, you bought a single stock at $34.231 and sold it a few hours after at $36.843. You earned a capital gain of 7.6% and a gross profit of $2.612, which is not much considering the deductions of taxes and fees. But if you started with 100 shares, your gross profit would have been $261.2.  

Costs

Each transaction has some taxes and fees attached to it. Because of the frequency of transactions in trading, it would be costlier. This is also the reason why a big capital is preferred to dilute the taxes and fees. Unlike investing, only minimal maintenance costs and commissions are paid for.

Skills

Traders must be quick and decisive like they’re running on a deadline. Investors take their sweet time diving into in-depth research to avoid making the wrong decision right at the start of the long journey ahead.

Choose Your Playing Field

Which is better: trading or investing?

It depends. Make a tally of your preferences in the key aspects of the difference between trading and investing. Whichever column has more numbers in your tally, then that’s probably the better strategy for you.

But there’s no one stopping you from doing both. Yes, you are free to apply both strategies especially for stocks and real estate!

For beginners, the default route is investing because you can start little and you don’t have the urgency of time. As soon as you’re settled with your investments, you can begin exploring how trading works. Becoming a skilled trader requires time and experience. Use your passive time in investing and the demo account to gather experience. There are free demo accounts online that simulate real stock trading but use fake virtual money. 

Closing Notes

Now that you know the difference between investing and trading, everything becomes clearer and more distinct in the financial market. Determining which one is better than the other depends on your strengths. Ross Cameron, the founder of Warrior Trading, found success in trading. Warren Buffett, CEO of Berkshire Hathaway, found success in value investing. Wherever your success is, it starts by focusing your strengths on your chosen playing field.

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