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What is the Difference between Trading and Investing?

Difference between Trading and Investing

Investing and trading are two ways people try to make money in the financial markets. Both involve participating in the market to earn profits. In your life, you might have heard these two words being used around you. At the same time, you might also have found people using these two words interchangeably. However, let me inform you that these two words are different and should not be used interchangeably.

Here, you must know that Investors aim for bigger returns over a long time by buying and holding assets. Traders, on the other hand, profit from both upward and downward market movements by quickly buying and selling assets, aiming for smaller but more frequent gains. Therefore, these two are two varying concepts in the financial world. 

Understanding Investment

At the very outset, you must know that the aim of investing is to slowly grow wealth over a long time. This is done by buying and holding a mix of assets like stocks, bonds, mutual funds, and ETFs. These investments are typically owned for years or even decades, benefiting from perks like interest, dividends, and stock splits. While markets can go up and down, investors usually wait out the downturns, expecting prices to recover eventually. They focus on market fundamentals like P/E ratios and management forecasts.

The Styles of Investment

Investors usually follow one of two investment strategies, which are described below:

  • Active Investing: 

Active investors regularly monitor the markets and make adjustments as needed. They actively seek investments that aim to match or beat a specific benchmark index.

  • Passive Investing: 

Passive investors adopt a buy-and-hold approach. They don’t actively track the markets on a daily or regular basis. Instead, they aim to replicate the returns of a benchmark index.

The Time Issue

Investors typically have long-term goals and invest with a horizon of more than one year. Thus, they often end up using a buy-and-hold approach. The duration until they recoup their investment depends on their strategy and goals. For example, saving for retirement involves a longer horizon compared to saving for a house down payment.

Decoding Trading

Trading involves frequent transactions, like buying and selling stocks, commodities, currency pairs, or other assets. The aim is to achieve returns that go past those of buy-and-hold investing. While investors may be satisfied with annual returns of 10% to 15%, traders may target a 10% return each month.

Trading profits come from buying low and selling high within a short time frame. On the other hand, profits can also be made by selling high and buying back at a lower price to profit in declining markets.  While buy-and-hold investors hold onto less profitable positions, traders aim to make profits within a set time frame and often use a protective stop-loss order to automatically close losing positions at a predetermined price level. Traders often use technical analysis tools like moving averages and stochastic oscillators to identify high-probability trading opportunities.

Also read: The Complete Forex Guide for Successful Trading

Understanding The Style of Trading

A trader’s style indicates the timeframe for buying and selling assets like stocks or commodities. Traders typically fit into one of four categories:

  • Position Trader: Such a trader holds positions for months to years.
  • Swing Trader: Such traders hold positions for days to weeks.
  • Day Trader: Day traders hold positions within a day, with no overnight positions.
  • Scalp Trader: These traders hold positions for seconds to minutes, with no overnight positions.

Traders select their style based on factors like account size, time available for trading, experience level, personality, and risk tolerance.

The Time Frame

Traders focus on short-term goals when making trades, unlike investors who think long-term. They keep a close eye on market movements to time their trades effectively. Their aim is to capitalize on price fluctuations to increase profits and reduce losses. A trader’s timeframe can range from minutes to days.

Trading Vs Investing: Points Of Convergence

The aim of both investing and trading is to make money. Investors and traders achieve this by opening accounts to buy and sell assets like stocks, bonds, and mutual funds. Both investing and trading involve risks and rewards, as there are no certainties in the markets. While assets offer the potential for significant gains, they also carry the risk of losses, albeit to varying degrees.

Trading Vs Investing: Points of Divergence

Investors and traders differ in how long they hold their assets. Investors usually have a longer time horizon, typically over a year, while traders hold assets for shorter periods, sometimes just minutes. Both investors and traders face the risk of losing money, but traders often face higher risks. This is because they hold assets for shorter durations and may invest in a wider range of assets like futures and swaps, which investors may avoid.

Trading demands significant time, effort, market understanding, and research compared to investing. Many traders are experienced and knowledgeable about the markets, while investors may rely on financial experts like financial advisors for guidance.

The Comparison Chart

Key SimilaritiesKey Differences
Both investing and trading aim to make money.Investors typically have a longer time horizon, usually over a year, while traders hold assets for shorter periods, sometimes just minutes.
Both involve opening accounts to buy and sell assets.Traders face higher risks due to holding assets for shorter durations and investing in a wider range of assets like futures and swaps.
Both carry the possibility of risk and reward.Trading demands more time, effort, market understanding, and research compared to investing. Traders are often experienced and knowledgeable about the markets.
Every asset has the potential for both gains and losses.Investors may rely on financial experts like financial advisors for guidance, while traders usually have a greater sense of how the markets work.
Traders may hold a diverse set of assets that investors may not keep in their portfolios, such as futures and swaps.

Final Words

Investing and trading are often mistaken for each other, but they have clear differences. Both involve opening accounts, depositing funds, and trading assets, but investors typically have a longer time horizon and are more cautious. Traders, on the other hand, tend to be more knowledgeable about various assets and markets. Regardless of whether you are investing or trading, it is essential to understand both the potential rewards and risks involved. 

Also read: Trading Account: Can I Open One Trading Account?