Trading and investment both are the opposite sides of the same coin. They help the traders and investors earn profit in the financial market.
Now again, though trading and investing are both about gaining profit in the financial market, their working mechanism is entirely different. On one hand, trading is a short-term investment route; investing needs a long-term commitment.
What is Investing?
Investing helps the marketers to gradually build wealth over an extended period of time. Investors achieve this goal through buying and holding of a portfolio of stocks, bonds, mutual funds and other investment instruments.
These investments are often held for a period of years or even decades. This helps the investors take advantage of several benefits like interest, dividends, and stock splits along the way.
While financial market is bound to fluctuate, investors have the option to “ride out” the downtrends as the prices are expected to rebound during good times and any losses occurred, eventually will be recovered.
What is Trading?
Contrary to investing, trading is about more frequent transactions, which involves buying and selling of commodities, stocks, currency pairs and other investment tools.
In general, traders enter and exit the market within days, weeks, even minutes, taking smaller but more frequent profits. Their goal is to generate returns that perform better in short-term buying and holding of financial assets. What ultimately matters to them is which direction their stock will move next and how they can profit from that move.
While traders may seek a return of 10% every single month, investors may be content with an annual return of 10 to 15 percent.
Illustration: Investing vs. Trading
To understand the basic difference between investing and trading, let’s start by looking at the two most influential people in the world of wealth creation.
You must have already heard of them; they are – Warren Buffet and George Soros.
Warren Buffet is known for his long term investments; whereas, George Soros is a well-known trader. Though both of them have made huge piles of money over their lifetime, they’ve done it using the entirely different financial dynamics, viz. investing and trading.
Warren Buffet is worth approximately US$67 billion and has made his money by holding off stocks of certain companies for decades.
Then, there is George Soros whose net worth is approximately US$24.2 billion and he has made money from countless number of trades.
Let’s get into the specifics of trading and investing to understand the differences between them better.
Who Are You – The Investor or The Trader?
Which financial category do you belong to? Are you a trader or investor?
Below-enlisted points discuss the characteristic differences of investing vs. trading:
As mentioned above, traders remain in the stock market for a much shorter time period as compared to that of investors. As investors have to patiently wait for the price of their stocks to reach the desired value; thus, their tenure in the financial market is at the higher end.
Though both investors and traders put their money at risk in the capital market, still trading involves a bigger risk factor as compared to investing. This is because, unlike investing, trading of stocks doesn’t get an exposure to rigorous money movements to recover money losses caused by the market fluctuations.
You might have come across the phrase several times that, “Stock markets are subject to market risks” and this is indeed true. It doesn’t matter, whether you choose investing or trading, none of them comes with guaranteed returns. So, take off by starting small if you are new into the stock market investment.
The more the risk, the higher the returns – this statement works for stock markets, too. As trading has more risk factor, it also comes with the chances of gaining higher profits. The traders also get higher yield percentage as they continuously transfer their money from low-yielding stocks to higher-yielding stocks.
On the other hand, return in investing is dependent on the investor’s decision unless they decide to dis-invest the amount or transfer it to another stock from a low-paying investment stock.
Investing is a well-formulated plan designed to remain in the stock market for a longer period of time. The interests and dividends earned thoroughly in that tenure defines the final income of the investor.
On the other hand, in trading one need to regularly monitor the market conditions as every single fluctuation can impact the final income of the trader.
Investing vs. Trading: Wrapping it Up
Investing and trading, both of them need experience and skills to drive in financial market and separately work towards attaining the ultimate goal of wealth creation. In addition to that, they have their own set of pros and cons associated to them. So, ultimately it is your financial needs and decision to go with either of them that makes the actual difference.
In the end, what’ s most important is to be cautious while handling your money and do a thorough research before putting-in your money in either of them.