Trading vs Investing
The age old question; Trading or Investing, which is better?
Truth is, one is not above the other. While the terms are used interchangeably, however there are key differences between “trading” and “investing”
While both fundamentally seek profits through participating in the financial markets. Investing and trading adopt two very different approaches. In general, the goal of investing is to build wealth over the medium to long term while trading is to generate profits in the short term.
Trading
Trading involves a higher frequency of transactions, and tends to hold assets or trades for a much shorter amount of time, it could be days, hours or even minutes. Unlike the investors who traditionally seek price appreciation to profit in the markets. Traders stand to profit both ways, in both bullish trends (rising prices) and bearish trends (falling prices). Instead of focusing on an asset’s long-term growth prospects like investors do, traders focus on which direction the asset’s price is likely to head next and try to profit from that price movement.
Investing
Investing involves buying and holding an asset that you expect will rise in value over time. Investors often hold these assets for years, even decades, to generate substantial profits from the rising asset prices and any income generated from the assets over time, taking advantage of perks like interest, dividends, and stock splits along the way. While markets inevitably fluctuate, investors will "ride out" the downtrends with the expectation that prices will rebound and any losses eventually will be recovered. Investors typically are more concerned with market fundamentals, such as price-to-earnings ratios and management forecasts.
Trading vs Investing
Both traders and investors are market participants and seek to profit from the financial markets. What separates them are their different philosophies, and methods of analysis to make their financial decisions.
Here are some common differences
Financial Goals
| Traders | Investors |
| Generate and achieve returns by buying and selling assets. | Building wealth by price appreciation and reinvesting dividends. |
Periods of Investments
| Traders | Investors |
| Short periods of investments; as short as days, hours, or even minutes | Longer periods of investments; can hold assets for years, up to decades. |
Risk Involved
| Traders | Investors |
| Higher risk because traders tend to speculate short-term market volatility which can be highly unpredictable | Lower risk as investors avoid making decisions based on short-term fluctuations. |
Time & Effort
| Traders | Investors |
| Traders have to continuously monitor the markets due to its price volatility. | Higher Effort is required during analysis. Lower Effort during monitoring, and performance review |
Type of analysis performed
| Traders | Investors |
| Traders use more technical analysis to trade the markets as compared to fundamental analysis. Decisions are based on analyzing historical price movements and price charts. | Investors rely more on Fundamental analysis. They analyze Performance Reports, News events, Statements of Accounts, and future growth prospects. |
In summary, both traders and investors may have different approaches and methods of analysis to make their investment decisions but that does not mean one method is superior to the other.
Trading can be more fast-paced and leads to larger gains in a shorter amount of time, but with that said, it also means larger losses.
Ultimately, which strategy you employ will be dependent on your financial goals since there can be room for trading and long-term investing in your financial journey.
* The content presented above, whether from a third party or not, is considered as general advice only. This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments.