What’s The Difference Between Trading And Investing?

Trading And Investing

The essential difference between investing and trading is timing. Traders look to generate as much profit as they can quickly.

Investors have the same goal but are ready to grow their profits over a longer time. And yes, you can be a trader and investor simultaneously.

What Is Investing?

Investors buy and hold assets for years or decades, aiming to grow profits from rising asset prices and reinvest income.

How long investments are held depends on the investor’s financial goals. For example, a retirement saver may stay invested for 20 years or more, whereas someone saving to buy a home will have a much shorter timescale.

Investors can consider higher risk and higher return strategies than traders because they have time to ride out market volatility. This is called ‘the risk/return trade-off’.

The philosophy of many investors is to accept short-term market volatility leading to portfolio underperformance in the hope that time will smooth any losses.

Investors have two main styles:

  • Active investing – when investors are buying and selling assets to generate a return that is better than a benchmark index, like the S&P 500
  • Passive investing – when investors buy tracker funds or exchange-traded funds (ETFs) to hold and match the performance of a benchmark index

What Is Trading?

While investors are more prepared to sit back and wait for their assets to mature over time, traders are opportunists.

Traders hold their assets for a much shorter time – often for less than a day – aiming to make money from small price movements.

The critical difference between investors and traders is that investors want to make money from a rising market, but traders play both sides, seeking to profit from rises and falls in asset prices.

Trading takes time differently from investing, as scouring the markets for suitable assets to trade eats up the hours.

Traders can pick or mix from a list of several trading styles, including:

  • Day trading – when a trader buys and sells an asset between the time a market opens and closes.
  • Scalping – a way to trade that’s even quicker than day trading. Scalping can take place in a few seconds or minutes to reap small profits that add up over time.
  • Position trading – making gains from price trends that tend to last for days or weeks, like an asset’s price steadily rising over time.
  • Swing trading – similar to scalping, but taking advantage of more extensive price changes over a longer time.

What’s In A Name?

Don’t worry about labelling yourself an investor or trader, as most investors mix and match styles according to the opportunity. Others deliberately split their portfolios to take advantage of long-term asset holding while giving themselves a small war chest to dabble in trading for quick profits.

But the way investors and traders handle three key factors points toward their main strategy.

Choosing a market

Investors target stocks and shares as their main sphere of operations. Historically, investing in stocks has delivered massive returns for investors despite disastrous market crashes that have wiped out millions of savers.

For example, the S&P 500 has returned an average of 10 per cent a year since 1926.

Traders tend to have their fingers in more pies than investors to try and enhance their profits and temper risk. As a result, traders will seek volatility – the often unpredictable short-term rises and falls in the price of an asset that offers trading opportunities.

The classic volatile market today is cryptocurrency. Traders can make big crypto profits in a short time – and stand to lose them just as quickly.

Investors will own their assets, but traders often do business with financial instruments, like contracts for a difference (CFDs), that allow them to profit from the asset’s price movements without owning the asset.

CFDs and similar papers are a gamble that can enhance gains and magnify losses.

Finding the right investment

How investors and traders choose their assets is vastly different.

Investors want to know everything they can about an asset before they buy. For shares, this can mean analysing several years of accounts, the market for the company’s goods or services, competitors and the fit with the broader economy.

This is called fundamental analysis.

Traders have a different approach called technical analysis.

The dive into a company’s background includes researching prices, trends, patterns and other indicators to build a picture of historical price movements to use them to predict future changes.

Managing risk

Investing and trading both come with different sets of risks and their ways of managing them.

Investors tend to split risk into two categories –

  • Market risk – when the entire market dips in value
  • Specific risk – a risk affecting a particular asset

Diversifying a portfolio is the main tool for managing risk. Diversification means spreading money over several different assets, markets, countries and currencies. The aim is to accept losses gracefully as other investments will take up the slack by making profits.

Traders take a different view of risk and look out for:

  • Leverage – While borrowing to buy more stock can increase profits, the risk is leverage can magnify losses, too.
  • Volatility – Gambling on small price fluctuations can make money – but traders can lose money just as much even quicker if the price of an asset turns unexpectedly.

Some defensive strategies can help, like a sparing use of leverage, not over-exposing a position or taking advantage of stop losses that freeze a position.

Investment v Trading FAQ

What are stocks and shares?

A fine line separates stocks and shares, but the terms are often interchangeable. For example, before the digitalisation of the markets, a stock certificate listed the shares an investor owned in a company. Now, stocks and shares mean the same.

What’s meant by support and resistance trading?

Market analysts often talk about the support and resistance levels of assets. Support is the price an asset cannot fall below, while resistance is the price the asset finds difficult to rise above. Traders who have established these two levels try to profit from predicting rises and falls in the asset’s value.

What is break-out trading?

Assets break out when their price bursts through support or resistance levels.

Can I be an investor and a trader at the same time?

Yes. The titles are not mutually exclusive. Many investors hive off a small section of their portfolio for trading and vice versa.

What do traders invest in?

Traders look for volatile assets, like cryptocurrency, stocks and shares, commodities or currencies. They are also more likely to use financial instruments like CFDs (contracts for a difference).

Does age affect investment style?

Yes, age certainly affects investment style. For example, as an investor approaches retirement, they tend to want to take less risk with their cash, so they often move into ‘safer’ assets like government bonds (gilts in the UK and Treasuries in the US). The rule of thumb is that younger investors and traders can accept more risk as they have more time to recover from losses.

What is risk?

In simple terms, the risk is the amount of money an investor or trader can lose on a single transaction.

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