What Is The Difference Between Trading And Investing?

Investors seek capital growth without care for the timing, whereas traders seek short-term gains. Traders are riskier. Your risk tolerance and growth forecasts determine whether you should invest or trade.

What is the difference between Trading and Investing?


What is Investing?

Investing is devoting resources such as time, energy, or money in hopes of a return. Real estate is one of the oldest and most well-known investments. You acquire an unfinished house and sell it later for more or acquire a terrible house with promise, renovate it, and sell it for more.

Other examples of investing include:

  • Long-term stock market investments in companies that you value
  • Purchasing mutual funds
  • Purchasing Bonds
  • Purchasing precious metals
  • Investing privately in startup companies in which you have faith

There are different forms of investments, but the key is to create and build wealth. If you buy in KO (Coca-Cola) or AAPL (Apple) stocks, you're doing it for the long term with the purpose of receiving dividends and watching your cash grow over the years. Eventually, you'll cash out your assets, but you're not in it for the short term.


What is Trading?

Traders purchase and sell stocks, futures, options, commodities, currencies, and cryptocurrencies.

Traders don't worry about long-term worth; they seek to:

  • Buy low, and sell high to profit from short-term market movements.
  • Profit by short-selling anything at a higher price, (betting the price will drop).
  • All in short durations to beat long-term returns.

Traders must take on more risk than investors. Entering the market with the purpose of departing in a shorter timeframe might lead to extraordinary profits or losses.

Several trading methods vary by the timeframe positions are open, including:

  • Swing trading: holding trades for days or weeks.
  • Day trading: maintaining positions for one day (at the end of the day all trading positions are closed).
  • Scalping: holding positions for minutes or seconds.

Financial leverage is one of the major instruments traders use to maximize risk/reward. This instrument costs money, and it's rare for a position trader to keep a leveraged trade open for years while paying daily fees. Leverage is a high-risk investment tool where traders use borrowed funds from the trading platform to boost investment or project returns.
 

Stock leverage example:

You can borrow twice as much as your investment using 2:1 leverage. Say you wish to invest $10,000 but only have $5,000 in your trading account. You could use a 2:1 leverage so you could invest $10,000.


Trading Tips

High-value trades:

As a trader, you want to make money, not place lots of deals that enrich your broker. Know what kind of setups are best for your plan. Identify your trading goals and fight the impulse to purchase or sell impulsively because you "should be trading."


Trend-watch:

You're not an investor. If a trade goes poorly, don't tell yourself  'the market will come back' or 'the market is wrong' Trading requires discipline, we're told. One significant loss shouldn't destroy the good trades.


Profit wherever possible:

When a deal goes well, many traders think it's heading to the moon. When entering a trade, it helps to know where you want to extract profits. Don't lose a good trade over greed.


Limit losses:

You shouldn't relax your risk management just because you're identifying smaller moves. Before you trade, know where you'll get out and place a stop-loss order.


Risk-reward ratio matters:

This relates to stopping loss and targets. You're probably not as right as you believe, so make sure your prospective rewards are worth the risk. You can still make money if you're right fewer than half the time.


Read economic news:

Know what economic announcements are due and how they could affect the markets you're watching. For example, you may have seen the most reliable chart pattern in the world, but if US Feds' interest rates are due out in 90 seconds, the market could move irrationally. Nowadays, most brokers provide economic calendars, so there's no excuse for not knowing what's happening in finance.


Investing Tips

Financial goals:

Before investing long-term, consider your financial goals. Any investment has a goal. Unless you have a clear knowledge and vision of your goals, long-term investing will be difficult. Medium-term goals take three to five years to complete versus six months to a year for short-term goals. Long-term goals are over ten years. Once you know your goals, you can estimate the cost. It will organize your finances and push you to save and invest. So, redraw your life goals, assess your funds, and get going.


Early investing:

Start early since long-term investing involves discipline and patience. Early start encourages financial discipline and compounding. Compounding boosts wealth. Early birds have advantages. It helps your money grow and counters inflation.


Avoid market noises:

When things go awry, market opinions fly thick and fast. Everyone becomes an expert and shares opinions. Long-term investing requires ignoring noises, which might be diversions. If necessary, consult a financial counselor who knows your plan, positioning, and goals. Market sounds often cause investors to behave impulsively, leading to bad investments. Consider the big picture and stick to your aims.


Diversify:

Individual genius can win a few games, but it takes a team to win. Long-term investing is similar. One financial instrument is not enough. Diversify your assets among asset classes, including equities, bonds, and gold. Invest in large-cap, mid-cap, and small-cap equity funds, for example. Diversification balances risk and reward in your portfolio. Optimal diversity reduces risk. Diversification boosts returns because market events affect each asset type differently.


Conclusion: 

Investing and trading differ in approach, risk, and time. It's fine to do both; it depends on the person's risk-taking abilities and patience. Long-term investing is less risky than short-term trading but when traders make the right selections and the market performs well, they can earn more than investors.

 

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Comments

Danny Straus 1 year ago Member's comment

Thanks for the tips.

Enda Trading 1 year ago Contributor's comment

Thank you Danny for reading my article and for your positive comment.