Trading vs. investing are two terms that rule the financial markets. While both investors and traders aim to make money in the financial markets, the methods they use to achieve that goal are different. Traders seek to profit from the market within a shorter timeframe and take advantage of both falling and rising markets in order to earn smaller profits more frequently. On the other hand, investors buy and hold, so that they can get larger returns on their investment over a longer period of time. Let’s inspect trading vs. investing more closely.
Trading
Trading is characterized by more frequent transactions. A trader will buy currency pairs, stocks, commodities, and any other financial assets in the market, and sell them shortly afterwards to another trader or investor in order to profit from the price difference. A trader may seek a return of 10% per month, unlike an investor who looks for annual returns of 10% to 15%.In trading, profits are achieved through buying at a lower price when the market is on the rise and selling at a higher price (usually after a relatively short timeframe). A trader will also sell at a higher price in a falling market so that he/she can cover themselves later on by buying the same stocks back at a lower price.In trading, one can use protective measures such as stop-loss orders to prevent losses beyond a predetermined price level by closing out losing positions automatically. This is meant to maximize profits and minimize losses within a specified period. To find trading setups with high profitability, traders rely on technical analysis such as charts, stochastic oscillators, and moving averages. Based on their trading style – that is, the timeframe within which they buy and sell financial securities – traders are categorized as:
•Scalpers, those who enter and exit positions within minutes or seconds
•Day Traders, those who enter and exit trading positions throughout the same day
•Swing Traders, those who may hold positions for several days or weeks
•Position Traders, those who hold positions for several months or years
Investing
An investors aim is usually to build wealth gradually over a long period of time through the buy-and-hold approach of financial assets like stocks, bonds, and mutual funds. Investors hold their investments for years, even decades, and profit from stock splits, interest, and dividends along the way. Investors often don’t mind too much when there is a short-term fluctuation in price, as they hope that losses resulting from such short-term spikes in prices will be recovered in the long run.An investor’s focus is more on market fundamentals such as prospects of the company, management forecasts, and price-to-earnings, as opposed to technical analysis. Most investors are not actively involved in tracking the daily performance of their assets, because their goal is to grow wealth or retirement accounts over an extended period.
Differences Between Investing and Trading
•Time frames: traders hold stocks for a short time frame, usually seconds, minutes, days, or weeks. Investors hold investments for years, decades or even longer.
•Price fluctuations: trading takes advantage of short-term price fluctuations to realize a profit. Investors usually overlooks short-term fluctuations as insignificant in the long run.
•Skills: some might say that trading is a skill, while investment is more of an art. Trading involves timing the market by monitoring price movements and selling if stock prices go up. Investment is the art of accumulating wealth through dividends and interest in the long run by holding onto assets through the ups and downs in the market.
•Analysis methods: traders are more focused on the technical aspect of the market. They rely on technical indicators such as moving averages and stochastic oscillators to identify trading setups that can present more profitable opportunities more quickly. Investors focus on the fundamentals surrounding the company in which they want to invest and seek to align themselves with how the business is run and managed for a long-term commitment.
Now that you are savvy on the difference between investing vs. trading, why don’t you start your trading journey now! CFI presents you with numerous opportunities. We offer you Contracts for Difference so that you can trade commodities, forex, stock, and indices. Open your account with us now and start your journey today as a trader or investor.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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