Trading and investing are two terms that are often used replaceable. But do they really have the same meaning? Not exactly. So what is the difference and how to choose the best option? Get the answers in today’s article.
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Trading vs. investing
Let’s compare them to running in a race for a moment. There are different ways that can lead to victory. One is constantly running at a similar speed. Another is to sprint some distance, then walk, and then sprint again. There is no clear answer to which runner will win.
Both, trading and investing have the same goal which is to earn money. While trading concentrates on short-term buying and selling, investing implements holding securities for a longer period. Both can be profitable. Which one to choose is an individual decision. It should be based on your market knowledge level and the time you are able to invest in it.
Trading in a nutshell
Basically, trading is opening many short-term trades. You can trade stocks, forex, commodities, and other kinds of securities. And by short-term, we mean any time from a few seconds to a few years. The time you have a position opened is called the holding period.
Different traders types
We can divide traders by the trading style and the holding period they prefer.
Position traders are the ones who open transactions that last months or years even.
Swing traders keep the trades open for a few days or weeks.
Day traders hold securities for a day.
Scalp traders are characterised by the shortest holding period which is a few seconds or minutes.
Useful trading strategies
You could hear the expression “buy low, sell high”. This is a common strategy in the trading world. The aim is to get high returns in a short time so the best method is to buy when the price is low and sell when it significantly rises. The decisions when to buy and sell should be based on deep technical analysis.
Short selling is quite the opposite. The profit is made through the difference in prices. You sell the shares borrowed when the price moves high and then buy them when it considerably falls.
Limit and stop orders help traders to control the moment of opening a position. A limit order will trigger a buy or sell transaction when the price moves to a previously determined level. A sell stop order will automatically enter a sell trade if the stock’s price falls to a specified level beneath the current one. A stop-loss order will close the position. Pending orders are very convenient for managing your trades.
Should you become a trader?
You should like what you are doing to get better results. So if the market analysis and stock research talk to you, you may consider opening the Olymp Trade trading account. Trading gives you an opportunity to become an active participant in the market.
Do not underestimate the risk. You should think about risk management and have a good trading plan.
Trading is time-consuming. You have to learn about the market, about the trading platform, but also follow economic news, develop your strategy and keep a trading journal. All this takes time. So if you are serious about trading, be ready to dedicate a lot of time to it.
Overview of investing
The profit expected to gain through investing is not supposed to appear fast. Investing requires holding securities for a long period of time, years, or decades. You do not sell immediately when the market is going down. You wait for the end of your investment or to reach your financial goal.
The most popular investments are saving for retirement with Retirement Accounts. You do not have to actively participate in the market, you do not even have to check progress daily. You invest long-term.
Different investing strategies
The long period of investments allows you to earn on compound interest. Let’s say you invest $1,000 and, on average, your profit is 7% annually. At the end of the first year, you will possess $1,070. After two years, you will be at $1,145 (profit at $75). And after three years you will have $1,225 in the account. This gives you $225 growth of your original capital without adding to it.
Naturally, there is also a risk in investing. Nobody can guarantee that each year will bring you 7% returns. The situation in the market changes and so you can also lose occasionally. An important thing is not to make emotional decisions such as selling as soon as the market begins to go down. You should stick to your investing strategy and wait through a difficult period with a view to the long-term goal.
A good strategy for minimising the risk is diversification. Investing in different industries or asset classes makes you less dependent on one market only.
Is investing something for you?
Investing does not require as much time as trading. Once you make your investment decisions you do not have to monitor the situation in the market every day. It is a good idea to check regularly what is going on in your account, however, it does not have to be very often.
You can either do the analysis by yourself, or you can rely on investment funds or portfolio managers.
Pros and Cons of Trading and Investing
- ✅ Potential for faster profits with short-term trading
- ✅ Ability to take advantage of market volatility and short-term trends
- ✅ Opportunity to develop and implement specific trading strategies
- ✅ Long-term growth potential through compounding and asset appreciation
- ✅ Less time-intensive compared to active trading
- ✅ Diversification opportunities for reducing risk
- ❌ Higher risk due to short-term price fluctuations
- ❌ Requires constant monitoring and analysis of market conditions
- ❌ Emotional decision-making can lead to impulsive trades
- ❌ Potential for slower returns and long-term market fluctuations
- ❌ Less control over individual asset performance
- ❌ Requires patience and discipline to stick to long-term investment goals
Trading vs. Investing: A Comparison
|Short-term focus||Long-term perspective|
|Higher risk and potential for quick profits||Lower risk and potential for steady long-term growth|
|Requires active monitoring and analysis||Requires patience and long-term commitment|
|Opportunity to develop specific trading strategies||Opportunity for diversification and compounding|
|Short holding periods, from seconds to years||Long holding periods, from years to decades|
Trading and investing are about making money. They are, however, different. Investing is a long-term securities holding. Trading is more time-consuming, but the profits come faster. There are no wrong decisions which one to choose. It all depends on your financial goals and the time you can dedicate to them. You can also mix both.
I hope this article has helped you to distinguish investing from trading. Remember there are no guarantees. Both carry a risk. Be well-prepared and have a plan.
If you think about trading I invite you to open the Olymp Trade demo account. It costs nothing, and you will see what trading is and whether you are good at it.
Share your thoughts with us in the comments section below.
Best of luck!
Frequently Asked Questions
- Q: What is the difference between trading and investing?
- A: Trading involves short-term buying and selling of securities, aiming for quick profits. Investing focuses on long-term holding of securities for steady growth.
- Q: Which one is better, trading or investing?
- A: The choice depends on your goals, risk tolerance, and time commitment. Both can be profitable, so it’s important to consider your individual circumstances.
- Q: Can I trade and invest at the same time?
- A: Yes, many individuals engage in both trading and investing, combining short-term trading for potential profits with long-term investments for wealth accumulation.
- Q: Do I need extensive knowledge to start trading or investing?
- A: While knowledge and understanding of the market are beneficial, there are resources, educational materials, and platforms available to help beginners get started.
- Q: How can I manage risk in trading and investing?
- A: Risk management is crucial. It involves setting stop-loss orders, diversifying your portfolio, and developing a well-defined trading or investing strategy.
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