Investing vs trading: what are the key differences between the two and which is better? Well, the answer to this question often depends on what your financial goals are, your level of experience and how much time you have to dedicate to the markets. These two disciplines involve contrasting skills and levels of commitment. Here’s your cut-out-and-keep guide to what sets them apart.
What is the difference between investing and trading?
A good place to start is with a back-to-basics definition of what each involves. Generally, investors are interested in accruing wealth over a prolonged period of time – slowly cultivating a diverse portfolio of stocks, bonds and other securities.
It isn’t uncommon for investors to hold on to these assets for years at a time. Many accept that the value of their investments will experience highs and lows along the way – and grit their teeth through times of turbulence. There are some financial incentives to this strategy, given how they can benefit from perks such as interest, dividends and potentially stock splits. However, none of this is to say that investors aren’t engaged. They’ll be keeping a close eye on measurements such as price-to-earnings ratios and financial forecasts to ensure that their money is working for them.
Many investors have a long-term goal in mind. They may be planning for their retirement, to send their children to college, or to buy a property. Their current age, financial position and obligations will normally dictate how much risk they are willing to adopt. Although exposure to volatile stocks can result in some healthy gains, backing them excessively can prove calamitous for someone who is planning to leave the world of work in a few years.
Trading is an entirely different kettle of fish. These professionals have a very simple goal: to generate the highest returns possible and outperform those who simply buy stocks and shares and hold on to them. Assets bought one week can be sold the next – and in some cases, positions may only be maintained for a few hours. The sheer frequency of transactions means this be incredibly time consuming, not least because traders need to be fully across the markets to make informed decisions.
Investing vs trading: top tips for doing it right
Irrespective of whether you’re looking for short-term success or long-term profitability, there are some golden rules that traders and investors alike need to abide by. Failing to do so can result in some sizeable losses.
For traders, discipline is nothing short of essential. Those with experience go to great lengths to plan out their strategies meticulously – meaning they know precisely when they want to buy an asset and when they want to sell it. Failing to do this creates the risk that emotion will take over, cloud judgment and result in erratic decisions. Instead of holding on to a stock that’s continuing to lose money in case it bounces back, or a winning asset in case it continues to appreciate, they have the skill of cutting ties if it crosses the threshold with which they’re comfortable.
It’s also worth bearing in mind that this is a competitive field where there is plenty of room for error. As a result, smart traders only put a small amount of their total net worth at stake – ensuring that any mistakes won’t end up being financially calamitous. This is especially true for those who use leverage, where a small deposit of $1,000 can pave the way for a trading position of $5,000 or more. Although this can amplify gains substantially, it can also exacerbate losses to a devastating extent.
None of this is to say that long-term investing is a walk in the park. For risk-averse consumers who are simply looking to build up some savings, witnessing a substantial drop in the value of their stocks and shares can cause them to panic and sell. Not only will they get far less than what they initially paid but they’ll also miss out on the (probably) inevitable recovery in prices. Taking the rough with the smooth is a mantra that every investor should hold dear and those who may need access to their funds at short notice should look towards bonds and stable stocks as the best areas to store their cash.
Which is better: trading or investing?
There’s no clear-cut answer to this – trading and investing have different purposes and objectives. But if you’re unsure which to go for, there are some factors to bear in mind. Some traders end up spending beyond 40 hours a week monitoring the stock markets – practically a full-time job that requires them to be engaged whenever trading is taking place. Investing can be a better balance if you’re already employed, as an hour or two of research a month is more than enough to uncover new opportunities. Better still, it’s also possible to hire experts who can offer advice.
It’s also worth thinking long and hard about your personality traits and where your individual skills lie. If you’re patient, able to make quick decisions and can absorb large amounts of information, you may be suited to day trading. For those who are able to think about the bigger picture and aren’t prone to knee-jerk reactions, investing could be a good fit.
Don’t forget that you can always engage in both if you prefer. Diversification helps inoculate traders and investors alike from unexpected events in the stock market – and spreading capital across a number of instruments, industries and risk levels is a powerful insurance policy when something goes wrong.
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