You must have heard the words “trading” and “investing” about a thousand times now. These are both crucial concepts when we talk about the financial markets and how they operate. The goals of both an investor and trader are the same: make a profit!
However, trading and investing differ from each other in some key areas. Understanding that difference is crucial, especially for beginners. It serves as the very first step for beginners to find out the type of traders they are, and where their strengths and interests lie.
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Trading vs Investing
Trading is about the buying and selling of stock on a regular basis for a short-term profit. Traders often buy and sell stocks within a span of weeks, days, or even minutes. They focus on share prices. To them, the direction in which a stock is moving next and how to profit from is their focus.
On the other hand, investors have a long-term goal. Their investments are done in terms of years, unlike traders. Investors usually think in terms of timing, unlike traders who are concerned with the direction of a stock. They hold their stocks through the market’s ups and downs. Once they feel it is appropriate, they sell the stocks.
Investors usually study the long-term growth potential of a company, whereas traders take advantage of small price fluctuations in the market.
Types of Traders
There are three main types of technical traders. Before you start trading, it is important to know the different kinds of traders and the strategies they use. This will help you in choosing which type you wish to be. However, this does not mean that you should ignore all other styles. A trader should still be proficient in other trades as well.
Let’s talk about the three different types of traders.
Scalper – also known as micro-trading – involves the earning of very small profits, repeatedly.
In scalping, trades are typically very short and last anywhere from seconds to minutes. In this technique, you try to make many separate profits on tiny price fluctuations.
Traders who use this trading method usually make anywhere from 10 to upwards of 100 trades in a single day, in hopes of catching a large price move.
As a beginner, scalping may attract you. However, if you are a person who easily gets swayed by ego or if you get impatient easily, scalping is not the one for you.
Position Trader
Position traders stay in a single trade or multiple trades for weeks to months. These types of traders use a relatively long-term trading strategy. Traders can even hold their trades for years.
Traders who use this trading technique ignore short-term price movements. They tend to rely more on long-term trends and precise fundamental analyses.
This is good for you if you are patient and want to generate bigger profits over a longer period.
Day Trader
A day trader is the opposite of a position trader. Day trading is all about buying and selling on the same day.
Day traders do not hold onto their stocks or assets for more than a day. These traders close out all trades before the market is about to close.
Leverage is commonly used by day traders to generate greater returns from small price fluctuations.
To know more about what leverage is, check out my article discussing the basics of trading.
Time Horizon
One of the major differences between investing and trading lies in the time it takes to buy and sell a stock or asset.
Trading
In trading, you frequently buy, and then, you frequently sell. Your goal is to generate better buying and selling returns in a short period of time. Traders have no intention of holding on to the stock as investors do. Traders just speculate with the movement of the price to get a profit.
As a result, the profits are smaller but much more frequent.
Investing
Investors buy a stock with the intention of holding it. Their goal is not to sell as quickly as they can. Rather, they invest their money for years and years until they finally feel it is appropriate to sell.
The growth is longer, slower, and much more substantial than trading.
Should You Trade Or Invest? Know the Difference
Method
The approach for both trading and investing differs greatly.
Traders are more concerned with reading chart patterns, market price indicators, graphs, and considering other technical aspects of the market.
On the other hand, investors care more about the market as a whole and a company’s fundamentals that point toward potential growth. These include factors such as the PEG ratio, assets, debts, and much more.
Capital Growth
Through investing, you grow your wealth by compounding profits. That means that you build upon your current profits and dividends by reinvesting into more shares.
Conversely, trading allows you to get quicker but smaller profits from price movements over both long and short periods of time.
Financial Instruments
A financial instrument is a tradable asset. It can be anything with an underlying derivative. For example, shares, stocks, checks, and bonds are all financial instruments.
Any asset that holds some capital value and is tradable in the market can be called a financial instrument.
Trading instruments can include:
- Stocks
- Contract For Differences (CFD’s)
- Currency derivatives
- Exchange-Traded Funds (ETFs)
- Future Contracts
- Forward Contracts
- Options
- Metals (Gold, silver, copper)
On the other hand, investing instruments are:
- Stocks
- Bonds
- Mutual Funds
- Certificates of Deposit (CDs)
Capital Required
Since trading and investing are different types of strategies to generate profits, the capital required is also different.
Usually, you do not require very high initial capital to start trading. You can even start trading with initial capital as low as $100. Of course, this would largely depend on what trading style and strategy you plan to utilize. However, for people with limited funds, trading is a good place to start.
Compared to trading, investing may require you to have a little more money. However, it is still not significantly higher than trading.
If you want to start investing in stocks, you can begin with as little as $500 to $1,000. If you have less than $1,000 as initial capital, you can start with buying just one stock and adding to it over time.
Trading vs Investing: Which One is Better for You?
Trading and investing are both great ways to earn money. Both come with their own risks and loss factors.
Before choosing one over the other, you should make sure what your risk profile is and how much loss you are willing to suffer. Moreover, you need to know what your financial objectives are.
Keep in mind that trading can generate quick profits. However, it also comes with higher risk potential due to being so fast-paced. At the same time, stock investments are immune to the daily small fluctuations in the market because they are more long-term.
You can start by using demo trading platforms and see if trading suits you and whether you are any good at it.
Whatever you choose, make sure that you have the necessary knowledge required to understand and start your journey in the financial markets.
Conclusion
Trading and investing are two distinct methods of earning profit in the world of finance. You cannot say with certainty which one is better than which. This is because what suits one person may not suit another.
When done right, both methods can generate some serious revenue. The important thing is to find what works for you. This is done by reading and familiarizing yourself with the topic of trading and investing.
Check out my book Trading For Success to know what type of trader you are based on your personality.
If you enjoyed this article on Should You Trade Or Invest? Know the Difference or have any questions for me, please feel free to leave them in the comment section below!
Recommended Resources: If you’re interested in learning more about online trading, check out my book “Trading for Success; 8 secrets why women are better forex traders” and take a deep dive into my blog.
