Difference Between Trading and Investing

Trading and investing share the same end goal — making you money. But their differences set in when you draw your attention to the nature of the risks involved.

Both wall street and the stock market are marred with stereotypes that are misleading.

Trading vs Investing

The difference between Trading and Investing is that Trading means to resale the goods for a price whereas investing means to invest money in some schemes, projects, plans for earning profit in the future. Trading is for short term to medium term gain while investing is for medium-term to long term gain.

Trading vs Investing

Risk is high in trading while in investing, risk is comparatively low.

So before you rush into concluding anything, it’s important that you familiarize yourself with the basics, part of which includes understanding the difference between investing and trading at the fundamental level.

Comparison Table

Parameter of ComparisonTradingInvesting
PeriodHolds stock for a shorter period of time.Holds stock years, decades, or even longer.
Capital GrowthFocuses on the price movement of stocks. If prices shoot, they sell their stock and buy them when they fall.Focuses on creating wealth by compounding dividends and interest over the years after holding on to quality stock.
StrategyBuy to sellBuy to hold
ToolsTechnical analysis of oscillators and moving averagesMarket Fundamentals
– Price/earnings ratio
– Management Forecasts
ReturnOn Average, 10% Return each monthOn Average, 10 to 15% Return each Year

What is Trading?

Trading is more centered on making short-term profits. It doesn’t care about the long-term health of a company or what it does. It’s instead more concerned about predicting the price in the short-term for raking in quick profits.

Traders spend the bulk of their time analyzing trends and observing patterns, as they collect insights and use it to buy and sell stocks fort short-timed profits. Traders also happen to have their own unique way of minimizing losses.

For instance, they can adjust risks with tactics such as stop-loss (cutting losses when the price of stocks falls beyond a certain price point) or short selling (selling borrowed stocks in the hopes of buying them again when the price drops).

Trading

What is Investing?

Investing, on the other hand, is more focused on the big picture. They have a buy-and-hold philosophy that they use to build their wealth in a gradual manner.

So basically, what traders do is buy stocks that they believe may be undervalued or stocks of companies that they believe hold solid financial fundamentals.

They’ll then hold on these stocks for years in the hopes that their value will grow and make them colossal amounts of profits in the long run

It’s, therefore, safe to say that they’re more concerned about the long-term health of the companies they invest in.

Investors bank on variations in the stock market. They also have a way of re-balancing their portfolio in an effort to align them with their ever-changing life goals. And lastly, investors are masters of diversifying risks.

Investing

Main Differences Between Trading or Investing

By now you should have figured which between the two is right for you? But if someone was to advise you on the direction to take, what one should it be — trading or investing?

1) How much of this time are you willing to commit to the activity?

If you have enough time to dedicate to reading graphs and charts on a daily basis, then simple logic demands that you try a hand in trading. But if your regular time is somewhat limited, then you’re better off investing.

2) How far are you willing to go with research? Trading requires an extensive amount of research as opposed to investing.

You have to dedicate an ample amount of your time analyzing company growth, financial statements, financial projections, and history.

In other words, you have to be willing to put in the hours and do religious research and analysis on both the fundamentals and technical aspects of trading.

So unless you have this time on your hands, and the determination to drive you, then you might want to consider investing instead of trading.

3) How much are you willing to put in? The size of your investment and the goals you have to matter a great deal in determining the direction to take.

If your investment is somewhat limited, then you’re better off making a long-term investment.

However, if your investment is large enough, then you have better chances of making the most out of your investment if you opt for short term investments or trading.

Difference Between Trading and Investing

The problem with Juggling Both

You may be tempted to juggle both. But before you decide to proceed with this decision, there are things you might want to find out beforehand.

Here’s the thing: no plan is full proof. You may choose to invest, but still, that comes with no guarantees.

It’s at this point that you may be tempted to also try your luck in trading — and that’s where people sometimes go wrong.

First, you have to understand that trading and investing don’t operate in a similar fashion. The strategy you applied in trading and succeeded in it is certainly not going to work when it comes to making a long term investment.

Assuming you’ve decided to make a short term investment. But in an unfortunate turn of events, the price of stocks plummets.

As a trader, you’ll always have a way to circumvent the small losses and prevent them from growing into something big.

Also, as a trader, you’re not attached emotionally to the stock. So you should be able to know when to get rid of the losses at the right time.

However, by juggling both, you may find it hard to resist the temptation of holding onto your stock and not giving up on it.

So you have a trader who is unpracticed when it comes to investing, with little to no information on the company they’re investing in to make an informed decision on the stock to hold on or let go.

For a trader that’s also doubling as an investor, odds are the bulk of the decisions you’ll be making will be wild guesses.

The same goes for an investor who thinks they can trade. From what we know, you’re not supposed to sell off your stock when prices fall, but have some deep knowledge about the fundamentals that make you hold on to your stock regardless of what happens.

References

  1. https://dl.acm.org/doi/pdf/10.1145/323830.323842
  2. https://books.google.com/books?hl=en&lr=&id=u6RBDwAAQBAJ&oi=fnd&pg=PP1&dq=Trading+and+Investing&ots=ZmMIMnX0Hv&sig=_ylsKBKr5F8Bcv9snlM5MaQVvJs
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