Trading vs Investing
Overview
Investing and trading are two very different methods of trying to profit in the financial markets.
Both investors and traders look for profits by participating in the financial markets.
In general, investors are after larger returns over a long period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to buy and sell shares over a shorter timeframe, taking smaller, more frequent profits.
Investing is more of a marathon while trading can be viewed as a number of sprints.
Investing
The goal of investing is to gradually build wealth over a long period of time through the buying and holding of a portfolio of shares, baskets of shares, bonds, and other investment instruments.
Investments often are held for a period of years, or even decades, taking advantage of the benefits of dividends along the way. While markets inevitably change, investors will "ride out" the downtrends with the hope that prices will bounce back and any losses eventually will be recovered.
Investors typically are more concerned with market essentials, such as price/earnings ratios and management forecasts.
Anyone who has a pension fund is investing, even if they are not tracking the performance of their holdings on a daily basis. Since the goal is to grow a pension fund over the course of decades, the day-to-day fluctuations are less important than consistent growth over an extended period.
Trading
Trading, on the other hand, involves more frequent transactions, such as the buying and selling of shares, commodities, currency, or other instruments. The goal is to make returns that outperform those of investing, which involves buying and holding of shares.
While investors may seek to try and achieve an annual return of around 10% to 15%, traders seek a higher return than the average investor. Profits in trading are made by purchasing at a lower price and selling at a higher price within a fairly short period of time. The opposite is also true: profits in trading can be received by selling at a higher price and purchasing to cover at a lower price (also known as "selling short") to profit in falling markets.
A trader's style refers to the timeframe or “holding period” in which shares, commodities, or other trading instruments are bought and sold. Traders generally fall into one of four categories:
- Position Trader: This trader holds positions from months to years.
- Swing Trader: This trader holds positions from days to weeks.
- Day Trader: This trader holds positions throughout the day only with no overnight positions.
- Scalp Trader: This trader holds positions for seconds to minutes with no overnight positions.
Traders regularly select their trading style based on factors including the amount of time they can dedicate to trading, account size, their level of trading experience, risk tolerance and personality.
In Summary
- Investing takes a long-term approach and often applies to such things as retirement accounts.
- Trading involves short-term strategies to maximize returns daily, monthly, or quarterly.
- Investors are more likely to ride out short-term losses, while traders will attempt to make transactions that can help them profit quickly from fluctuating markets.
Trading and investing both consist of pursuing profit in the share market, but they chase after that goal in different ways.
Traders often focus on a share’s technical factors rather than a company’s long-term prospects. What matters to traders is which direction the share will move next and how the trader can profit from that move. Investors have a longer-term outlook. They think in terms of years and often hold shares through the market’s ups and downs.
Once you have decided on your investment strategy and goals, as well as your appetite for risk, you will be better able to tell if you want to invest or trade in shares.