Trading vs Investing. Which option is for you?
Trading and investing are often used interchangeably. Even though they both attempt to profit from financial markets, they do have some notable differences. In this article, we’ll define what they are, discuss the differences between the two, and which may be a better option for you.
In short, trading involves the short term buying and selling of financial assets. The aim behind these short and quick transactions is to try and take advantage of tiny market fluctuations. The length a trader will hold onto a particular asset varies, but traders can jump in and out of assets within weeks, days, even minutes, with the aim of short-term profits.
When a trader is analysing what to trade, they’ll often focus on technical factors rather than a company’s long-term future. The most important factor for a trader is which direction a particular stock or currency pair will move next and how that move can allow the trader to profit.
Investing involves buying and holding assets for a long period of time (generally 3+ years). The purpose behind investing is to try and typically build wealth over time, in the expectation that an asset will increase in value across years. Regardless of short-term volatility, investors will always focus on the long term view.
Investing is generally less time-intensive than trading, as you can easily delegate your investment to investment companies or use passively managed ETFs. Investing can be a good option if you’re after something that’s a bit more passive.
How do they differ?
When it comes to risk, manual trading can sometimes be riskier than investing, depending on the trading strategy you use. Traders have to seek opportunities to exploit market volatility; this means you must always keep your eye on financial news and economic releases. Not staying educated is risky and can result in making informed decisions, which can lead to losses.
Many brokers also allow traders to amplify the value of their trades by offering leverage. Leverage can be risky, particularly for inexperienced traders. When starting out, traders are likely to make mistakes and record losses; it’s a risk to further magnify these losses by using leverage.
Investing also comes with risk, and there’s always the potential of losing all your money. However, the reason investors can be better protected from risk than traders is that by holding a portfolio of diversified stocks, you will have some degree of capital protection against individual fluctuations. Also, investing in the market over the long term has historically paid off. Trying to time the market can be difficult and risky.
It’s not possible to say whether you’ll achieve higher returns if you choose one over the other, but if you are seeking short term profit and are looking to make a return more quickly, then trading could be a better option for you. Trading does involve higher risk but can yield higher returns.
Investing in stocks, for example, involves comparatively lower risk, but as it’s lower risk, it will also most likely yield lower returns. Although, over the long run, it could potentially yield higher returns through compounding interests and dividends. Daily market cycles don’t have as much of an effect on long-term investing, which makes it a good option for people investing for retirement, for example.
It’s important to remember that both options are never guaranteed to make you a return, and whether you choose trading or investing your capital is at risk.
- Level of time required
Manually trading the markets requires a lot of time and dedication. When trading, there are constant fluctuations in prices of assets, this requires constant attention from the trader and can be particularly time-intensive. If you want to be a trader, you must learn market trends and be able to time the market to hit higher profits.
Investing tends to be more passive, especially if you’re investing in assets such as a broad market index fund. Money into an investment portfolio can passively grow whilst you get on with the rest of your life.
It’s important to consider when managing your investments, how much time you will have to dedicate and how active you want to be when choosing between the two.
Which option is better suited for you?
If you’re looking for a more passive and hands-off approach to growing your wealth, then investing is more suited likely suited to you. The bulk of the work is down upfront when you analyse a companies fundamentals. It’s then just a case of having faith in a business’s core offerings and management to make a profit. Once invested in a business, you then have to remain unmoved by market noise and stay invested for the long-term to reap the rewards. As mentioned before, for an even more passive option, ETFs can be a good choice.
Traders, on the other hand, can benefit from both rising and falling markets and are able to achieve high yields on their money if they know what they’re doing. If you can confidently carry out technical and fundamental analysis, deal with high-risk stakes, and are dedicated and patient enough, then trading could be for you. Forex has enormous profit potential if you know what you’re doing.
There is no one size fits all strategy; what has worked for others may not work for you. Which approach you opt for will depend on your individual financial goals. If you’re more motivated by higher risk, higher reward then trading may be best for you. If you prefer to minimise risks and you’re okay with slow and steady returns, then investing will most likely be for you. Whichever approach you choose, make sure you stick to it.