Investing vs. Trading: What’s the difference?

To invest or to trade? That is the question.

Investing and trading aren’t necessarily mutually exclusive concepts. A trader can incorporate both investing and trading strategies while building up a robust portfolio. Trading and investing fall on the same spectrum of making profits from the stock market. The two are nothing but different approaches toward looking at one’s income, wealth and money management. 

Differences between investing and trading.

There are several factors that show how different trading is from investing.

Average time a person holds onto stocks

Investing is traditionally described as a process where you build wealth over a certain period of time by participating in the share markets. Buying a particular set of shares and holding on to them before selling immediately is a characteristic that is unique to investing.

Trading, however, is a strategy of making profits in the stock markets which requires the trader to take a more active role. Trading is when you purchase stocks, commodities, currency derivatives or futures with an intention to sell them at a higher frequency. Trading is suitable for those who seek to get higher returns on their investment in a short amount of time.

Growth of returns

Trading is the skill of focusing on price movement and making decisions based on the price. Most traders use trading strategies based on Technical Analysis to make their decisions such as which stocks to purchase, which ones to sell, and when.

Investing on the other hand involves fundamental analysis of the security’s potential for generating returns. It is the art of anticipating the amount of wealth that can be built by compounding interest and returns from dividends over a period of several years. Identifying the stocks that generate the right value is absolutely key to successful investing.

The Risk Factor

When it comes to the capital markets there is no transaction that is completely risk free. But when comparing trading and investing, inherently, trading involves a higher risk factor along with a strong possibility of higher returns. Investing is by nature risk-averse. Some rely on inflation and market forces over a long period of time to enhance their returns. Some set great store in the quality of the stocks that they purchase.

Investors prefer to wait out rough patches or downtrends in the market in order to gain a sizeable amount in the long-run. Investing wisely requires a lot of patience and trust in the quality of the organisation that you invest in.

Traders are the ones who specialise in capitalising on the uptrends and downtrends in the market in order to make the maximum level of profits possible, depending on the market conditions at the time of the trade.

Whether you are a trader or an investor, generating more profits on the basis of the initial amount that you spent in buying the security in the first place, is the ultimate goal. Reaching one’s financial goals and dreams is the end game. Both investing and trading are just different paths that you can take towards the same destination.

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