If you have already heard about investing, you may have already heard the term trading also. If you are wondering what is the difference between both, you came to the right place. Here’s the Difference Between Investing And Trading.
While trading and investment are made to make money from the markets, they differ in how it is achieved. Both parties are doing this to profit from the market. The key difference between these is the time horizon. Trading is aimed to profit from the market in the short term while investing is in the long term. Trading involves short-term strategies to maximize returns daily, monthly, or quarterly. Monthly and weekly are referred to as swing trading.
There are other trading strategies too, these are position trading and scalp trading. Position traders will hold a position for months to years. Scalp traders only stay in s positions for seconds to a few minutes.
During a trade, traders will attempt to profit from the market rising or dropping.
An investor is someone who invests for the long term; the investor will enter a position after thorough consideration. And ride through the ups and downs of the market. Investors will buy a stock or other asset at a lower price and sell when it’s high, through the buy and hold strategy.
Both trading and investing are not limited to stocks, it could be on other asset classes too.
Which Is Better, Investing Or Trading?
Answer to “Which is better investing or trading?” depends on the aim of the person. If the aim is to make cash flow from profits in the short term – Trading is the way. In case the short term cashflow is not necessary and the intention is to grow wealth over time, this can be a less risky way.
If you are a short term trader, you need to watch the market and identify the trading opportunities. You will need a higher initial capital to make a significant trading profit. Investment may not need a lot of money upfront, you can build your portfolio at a slower pace. Investors can choose not to pay a lot of attention to the short term market moves.
Investment and trading have their risks associated. You can choose to do either or do both. I’m the type of person who wishes to do both.
Investing
As I mentioned in the earlier section, the investor participates in the financial markets for the long term. There are 2 major themes for investments, value investing and growth investments.
Value investors identify good companies that trade below their fundamental valuation. Buy them and let the market re-evaluate the company’s fundamentals. These companies are usually the ones that were around for some time. These companies may also provide a dividend (share of profit) to the holder of the stock.
Growth investors identify companies that are in their early stages of growth, invest in them and wait for the company to increase in value. These companies may not be generating free cash flow. any profits generated will usually be re-invested to the company for future growth.
Here are some of the basic info related to investing:
Identifying companies to invest in
How investors identify good companies is through fundamental analysis. These are based on the historical performance of the company. It can be referenced from the annual reports and other filings of the company. These reports show details about the business plan, how the company makes money, how much the company makes and so on.
Good company share prices will go up in the long term. I will write in more detail about the fundamental analysis techniques in the future.
Trading
Traders use technical analysis to identify high probability trading set up. It consists of chart analysis, support and trends identification and other indicators. As I mentioned above, traders will usually have a short term profit mindset. It can be achieved by buying low and selling high in the desired period or selling high buy low (Short selling).
As trading provides short term profits, some people do this daily and be day traders. They enter and exit one or more positions on the same day, resulting in a profit or loss.
Let me touch on the basic details of the major trading techniques below.
Swing Trading
The goal of the swing trader is to capture a part of any potential price movement or “swing” in the market. Individual gains may be smaller as the trader focuses on short-term trends and seeks to cut losses. Yet, small gains achieved over time can add up to an attractive annual return.
Swing traders lookout for trading patterns to buy or sell a stock to capitalize on price fluctuations and momentum trends in Stocks. Swing traders are generally focused on large-cap stocks because they are the most traded. Since these stocks have large trading volumes, they provide investors with insight into how the market values the company.
Scalp Trading
Scalping is a trading strategy that aims to profit from slight price movements in the price of a stock. Traders that use this technique execute anywhere from 10 to a few hundred trades in a single day.
Believing that little price movements in stocks are easier to detect than huge ones. Traders who use this strategy are known as scalpers. If a tight exit strategy is adopted to avoid huge losses, many little earnings can compound into large rewards.
Day Trading
The most well-known active trading style is day trading. It’s used as an alias for active trading. Day trading, as the name suggests, is the practice of buying and selling securities on the same day. Positions are closed the same day they are taken, and no positions are retained overnight. Professional traders, such as experts or market makers, have done day trading. Yet, e-platforms has made this activity accessible to common people with smaller accounts.
Conclusion
I hope I was able to answer the key differences between investing and trading. If you have any specific questions on the points discussed, feel free to ask in the comments. As mentioned under the different topics, there is no right or wrong and it depends from person to person. Now that you know the basics, you may decide which works best for you. I will write more in-depth In the coming days and weeks, stay subscribed for updates or check back soon ya ;D