Understanding the difference between trading and investing is very important for traders, especially beginners. Therefore, it is the very first step for forex and stock traders to find out what type of traders they are and how they should build their trading strategy.
Trading and Investing. Definitions
So, trading is generating returns with often buying and often selling of trading instruments. On the other hand, Investing is building wealth over a long period of time through buying and holding investment instruments (more often stocks).
In two words, the trader believes the price will move in some direction and reach some target. The investor believes the company will perform well in the future and expects to get returns from dividends and higher share prices. You can easily see the difference by looking at two of the most influential people in the world of wealth creation. Warren Buffet, known for his long-term investments, and George Soros, who had made money from countless trades.
Trading vs Investing. What is the difference?
Period of holding positions
As you can see from the definition trading is a method of holding financial instruments for a short period of time. It involves frequent buying and selling with the goal of outperforming buy and hold returns. While investing is an approach that works on the buy and hold principle. Investors invest their money for some years or even decades.
Investing is the art of creating wealth by compounding (reinvesting profits and dividends into more shares). On the other hand, traders get their profits from short-term price fluctuations. They work both sides – long and short.
Approach and philosophy
Investors are more concerned with market and company fundamentals (PEG ratio, cash flow, assets, debts, etc). At the same time, traders are more focused on technical analysis (chart patterns, indicators, and so on). Certainly, swing traders take into account fundamental factors also.
Cost of transactions
No doubt, traders pay more commissions as they execute a big number of trades each day.
Is trading better than investing?
Both trading and investing involve the risk of losing your initial investments. However, trading has comparatively higher risk and higher potential returns as the price might go high or low in a short while. Investing involves comparatively lower risk and lower returns in the short-term period but might deliver higher returns by compounding interests and dividends. Overall, a lot depends on your character, risk tolerance, and skills you have.
Trading and investing are two different methods of attempting to profit in the stock market or other financial markets. Both investors and traders have the goal to profit through market participation. In short, investors target higher returns over an extended period through buying and holding. On the other hand, traders take advantage of both rising and falling markets. They enter and exit positions over a shorter timeframe, taking smaller, but more frequent profits.
Trading vs Investing. What is the difference? by Inna Rosputnia
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