What are the main differencies between investing and trading

trading and investingEarning profits is possible in various ways. Two of them are investing and trading. Some think these terms have equal meaning. They are, however, quite different. It is a bit like with running. There are a few approaches that can take you to the finish. You can run consistently at the same speed or you can alternately sprint and walk. It is hard to say which runner has better chances to be the first. Similarly, there is no way to tell you which brings you bigger money, trading or investing. But first, let’s discuss what they are.

Trading and investing – what are they?

One thing trading and investing have in common is their purpose which is to increase the money in someone’s account. The difference lies in the method. Trading is opening short-term buy or sell transactions. Investing demands you hold securities for quite a long period of time. You have to decide for yourself which one will work better for you. Get to know both, specify your objects and think how much time you can dedicate to them.

Trading

You know now trading is basically opening short-term positions. But what does “short-term” mean? Well, it can be seconds only, minutes, days, or even a few years. This time when the position remains open is known as the holding period.

We distinguish several trader types depending on the holding period and the trading style.

Types of traders

Those who open the position for a couple of months or years are called position traders.

The holding period of a few days up to a few weeks characterises swing traders.

Day traders are the ones who enter the trade for one day.

And those who hold securities for just a few seconds or minutes are known as scalp traders.

Major trading strategies

It is possible to trade forex, stocks, commodities, and many other types of securities. Every decision about buying or selling should be based on a profound market analysis.  There are plenty of helpful tools available on the trading platforms.

trading strategyOne of the most popular strategies says “buy low, sell high”. This means you should buy when the price falls significantly and sell when the price is high. The purpose is to make quite big returns in a relatively short time.

Another method is somewhat contradictory. It is called short selling. The profit is generated through the difference in prices. You sell the shares borrowed from your broker. Next, when the price drops, you simply buy them and return them to your broker. It may sound complicated, but it usually involves just clicking the sell button on your trading platform.

To obtain bigger control over the moment of opening the trading position you can place limit and stop orders. When you set a limit order, a buy or sell transaction will be automatically opened if the price reaches a predetermined level. Placing a sell stop order will trigger a sell transaction when the price drops to a previously set level below the present level. Place a stop-loss order if you want your transaction to be closed at a specific price.

Being a trader

Trading offers you a chance to participate actively in the market. You will conduct stock research and market analysis. It is best if this is something you are keen on.

There is always risk involved. Arm yourself with a solid trading plan and risk management.

risk managementAnother thing you should be ready for is dedicating a lot of time to trading. Learning how to become a profitable trader is a long process. You should know different instruments, a platform of your choice, then you should write a trading journal to keep track of your performance and be aware of economic events that can influence the price behaviour. Trading is quite a time-consuming occupation.

Investing

As I mentioned before, investing implies long-term objectives. You are not an active participant in the market, you do not have to buy and sell instantly when the price changes. You should wait instead for reaching the goal you have set or for your investment to end which normally is a few years or even decades.

Main investing strategies

Investing is a long-term securities holding. This empowers you to gain profits on compound interest. This provides you with the chance to grow your account without the need of adding more money to it. How does it work? Let’s take an example of the account with $1,000 initial capital. Your investment brings, on average, 7% annual profit. This means that after the first year there will be $1,070 in your account. With the same profitability, you will have $1,145 after two years and $1,225 after three.

investmentBe aware there are no guarantees. Average annual profit can change, the market conditions can change. But even if you occasionally lose, you should not succumb to the temptation of selling securities. You have to be prepared to wait a rough period through and remain faithful to the previously chosen strategy.

Diversification is an investing strategy that minimises the risk. It assumes buying not one but a few different securities or investing in various industries. This way, you are not dependent on a single market, so there are more chances that even if something goes wrong in one, you can still profit from the other.

Should you become an investor?

Investing is definitely less time-consuming than trading. It is still good to have some fundamental knowledge about the asset classes you wish to invest in, however, you can depend on portfolio managers or investment funds.

After making an investment, you do not even have to check how it goes on a daily basis. Reviewing it occasionally will be enough.

One of the most popular forms of investing is saving for retirement with Retirement Accounts.

Summary

Do you want to be a trader or an investor? Which sounds better to you? Because this is a very individual decision. Consider your financial goals, your vision as an active market participant and the time you are ready to spend on it.

businessman counting dollarsIt is naturally possible to mix both types of earning money. You can invest some amount of your overall capital and trade with another part.

Risk is an inseparable element in both, trading and investing. So never begin without having a plan and strategy designed.

If you want to test your skills in trading, you can open a free demo account. You will find such an account on many trading platforms. It costs you nothing and you can practice and check whether it is something for you.

Wish you good decisions!