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Do you want to test your wit, skills, insights, and maybe luck in the financial marketplace? There are two ways to do that: invest or trade.
However, if you’re just starting, you may ask: what’s the difference between those two options? What’s an investment? What’s trading?
Are there any similarities between these financial strategies? What are some effective investing and trading styles?
On the other hand, if you’ve had some experience in trading and investing, you know that each option offers unique opportunities, benefits, and risks.
Working with a reliable brokerage firm that cares about your results is critical to your success in the financial market.
Whether you’re a beginner who wants quality trading experience or a seasoned trader looking for optimal trading conditions, expert analysts’ keen and honest insights can help you thrive in your trading journey.
Read on for more information about investing and trading, including their differences, similarities, risks, potential benefits, and styles.
Trading vs. Investing Overview
People often use the words “trading” and “investing” interchangeably, but these terms are different.
Investing is usually a slow, long-term activity that involves financial asset ownership. On the other hand, trading is a more active approach to the market.
Traders are students of market cycles and movements. They seek to increase their profit potential by knowing when and where to place their money in the market.
Investing and Trading Are Two Approaches to the Stock Market That Bring Unique Risks and Benefits
Investors and traders engage in the stock market differently, so these individuals typically incur different risks and benefits.
For example, as an investor, you have to pay the total value of your money upfront. The amount you invest reflects the sum of your prospective risk and return.
With investments, you can lose the total price you paid for stocks in a “bad investment.”
Meanwhile, trading allows you to gain or lose much more than your initial investment.
What Is Investing?
Investing is all about acquiring assets with the hope of receiving future returns.
Investors use various tools for valuations. These people analyse ratios like dividend yield or price-to-earnings ratio (PER) that offer information about the company’s past performance and future forecasts.
What Are the 4 Types of Investments?
Investors often invest in the following products:
Stocks refer to shares of ownership in a company. Stock investment is ideal for people who don’t mind changes in investment values from time to time.
Buy stocks if you want to have a share in the potential profit and growth of your chosen company.
In a way, bonds are like promissory notes with serial numbers. You get your potential profit from bond investments when they mature.
At the maturity date, the bond issuer pays bondholders the bond principal plus the specified interest.
- Mutual Funds
A mutual fund acts as an investment vehicle.
If you invest in a mutual fund, then you’re investing in a large pool of money that fund managers can use to buy other investments like bonds and stocks.
An option entitles the holder to sell or purchase an asset fixed price on or before a particular date.
Investors lock in a stock price, hoping that its value will increase. However, the risk of options trading is that the stock’s value can also decrease: if the stock falls from its initial price, you lose the contract’s money.
Here are two ways to invest:
- Passive investing: The primary goal of passive investment is to match the benchmark index or market performance in the long run.
This approach uses funds like index funds and ETFs (exchange-traded funds).
- Active investing: Investors use this strategy of actively buying and selling stocks for their portfolio to outperform a long-term benchmark index.
The 3 Main Ways to Invest
The table below shows the distinction between three investment options:
“Shares” is another word for “stocks.” You can buy the shares of companies you think will grow in value to capitalise on the potential share price increase.
Moreover, people who invest in shares can exercise shareholder rights and receive dividends.
This financial instrument is like a regular mutual fund except that you can buy or sell it on a trading day when the financial market is open.
Some companies offer this particular service, in which the company’s in-house portfolio managers handle the client’s portfolio.
What Is Trading?
Unlike investing, trading offers a more active, short-term approach to the financial market.
Traders often retain assets for a lot less time than investors. Traders can short-sell shares in minutes rather than hold them for months or years. These individuals also intend to profit from rising and decreasing asset values.
Meanwhile, investors usually ignore asset underperformance, but traders are more likely to issue “stop-loss orders” to end losing positions automatically.
Here’s a list of usual trading practices:
- Swing trading: This strategy focuses on prominent price movements rather than basing positions on a price trend’s beginning or end.
- Scalping: This method seeks to generate small profits regularly. Scalping involves keeping a position for a relatively short period.
- Day trading: This option refers to opening and closing positions within the day or intraday.
- Position trading: This practice intends to profit from significant market fluctuations.
The 2 Main Ways to Trade
With spread bets, you can go long or short on the price changes of a market per point of movement. You’ll earn money if your forecast comes true, but you can lose funds if it doesn’t.
Your potential profit or loss in spread betting will depend on your bet size.
Investing vs Trading: Key Differences
Investing and trading differ in these areas: focus and time frame.
Traders generally enter and leave positions more quickly because they focus on market volatility.
In contrast, investors tend to hold onto their shares for much longer, hoping for more substantial profits.
Financial markets are spaces where market players can use different financial tools to transact. The law of supply and demand and the buyer-seller interaction can influence stock prices.
Research and Analysis
Another significant difference between investors and traders is how they research and analyse their markets and search opportunities.
Investors emphasise fundamental analysis. This approach involves assessing asset-intrinsic information to determine whether to buy or sell.
Meanwhile, traders focus on technical analysis. Using this analysis, traders evaluate price charts and examine indicators, trends, and patterns to predict an asset’s possible price movement.
Trading vs Investing: An Example
Here are two examples that can help you understand the distinction between trading and investing:
By April 21, 2021, investors who purchased GameStop stock on January 27, 2021, would have lost roughly 55% of their initial investment. Over this time, the S&P 500’s overall return was close to 12%.
As opposed to the S&P 500’s gain of almost 9%, if investors had purchased GameStop just one day earlier, they would have made a 7% profit.
Compared to the S&P, which was practically flat, a stock purchase on January 1 and a sale on January 27 would have generated a massive 1,740% return.
Tesla and Hertz
The year 2020 saw Tesla recover almost 743% compared to struggling Hertz’s loss of nearly 92%, while the S&P 500’s overall return was over 18%.
Tesla has returned roughly 5.5% that year (until April 21), compared to Hertz’s nearly 36%. The S&P was again near the centre, at 11.6%.
These examples suggest that, in trading, timing is crucial. A stock’s value doesn’t always go up. Traders must learn to read the market to predict the right time to buy or sell.
As noted above, the fundamental differences between traders and investors are their market emphasis and share-holding timeframe.
Investors emphasise prospective future returns and may hold assets for a long time.
In contrast, traders’ chief concern is to search for the best position for their money within the current market.
Consequently, traders may hold stocks for as short as several minutes or as long as months or even years.
How to Take a Position When Investing
The steps you must take to invest may vary depending on your broker and their trading platform.
Taking investment positions can also differ depending on the asset you intend to buy. Generally, you’d have to register an account with your chosen broker and follow their instructions.
When investing, you must determine the asset you want to acquire and your investment size.
How to Take a Position When Trading
Follow these three easy steps to trade:
- Open an account with a brokerage company.
- Choose your trading platform.
- Trade on various instruments, such as FX (Forex), metals, commodities, stocks, and indices.
You have two options when trading: “go long” (buy) or “go short” (sell).
Essential Investing Concepts
Below are discussions of essential investing concepts.
What’s a Stock Exchange?
Like food or clothes, financial assets, including ETFs and shares, have a place or a market where you can buy them.
A stock exchange is a centralised financial market where you can trade securities like shares and bonds for cash.
Every nation has a stock exchange where different companies’ shares are listed.
What Are Dividends?
Companies pay dividends to shareholders depending on their value increase.
Therefore, thriving companies are more likely to provide larger dividends than businesses struggling to maintain market value.
What Causes Share Prices to Fall or Rise?
Share prices can rise and fall depending on the performance of the company in the market.
A business’ asset value and share prices can increase when a company or fund performs well in the market. This scenario can happen due to effective fund management or the company or fund gaining higher public appreciation.
Share prices can also briefly increase or decrease due to the business’ most recent earnings season or a major press conference.
Essential Trading Concepts
Knowledge of fundamental trading concepts is critical to a successful trading experience. Here’s a list of trading concepts you must know:
What Is Short and Long Trading?
“Going long” refers to buying a position to profit from a rising market.
For example, you think Apple shares will perform well in the market, so you want to place a “long position” to profit from the potential outcome.
Traders can deposit a portion of the entire cost of opening a trade with “leverage” or leveraged products. This practice is also known as margin trading or margin requirement.
The full position size, not your deposit amount, determines your trade’s closing profit or loss. Your losses are the amount you forfeit, and profits are payable to you.
What’s the Margin?
Margin is the down payment necessary to start a leveraged trade.
A Beginner’s Guide to Investing in Stocks
In a way, investing is putting your money away for future use.
You can invest in different financial assets like bonds, stocks, mutual funds, ETFs, and options.
Experts know that while understanding basic terms is crucial, it’s just a small aspect of investing.
If you’re a beginner, there are some factors below that you should consider before embarking on your investment journey.
Steps to Get Started
Here are five essential steps that can help you start investing:
1. Determine Risk Tolerance
There are various ways to categorise stocks. There are small-cap stocks, aggressive growth stocks, large-capital stocks, and value stocks.
Those options have different risk levels. You can focus your investment activities on the assets that complement your risk tolerance once you’ve determined it.
2. Identify Investment Goals
You must also identify your investment objectives.
Your investment goals can be to save for college, buy a house, or fund your retirement.
However, your objectives can change. In order to stay focused on reaching them, define and evaluate them frequently.
3. Decide on Investing Style
While some investors are just content with placing and leaving positions, others actively seek to manage their investing decisions.
Your investing choices can vary in the future, but choosing one now can help you start strong.
4. Choose Investment Account
Select the account where you want to invest. These accounts may include retirement plans or taxable accounts with a broker.
5. Learn Diversification and Risk Management
Understanding diversification in investments is essential. Investing in different assets or diversification lowers the risk that the performance of one investment will materially reduce the return on your entire investment portfolio.
The Costs to Invest in Stocks
Here are some possible expenses for a stock investment:
Commissions and Fees
Generally, your broker will charge a commission each time you trade equities, whether you purchase or sell stocks.
However, some brokers don’t charge trading commissions; instead, they make up the difference in fees.
Depending on how often you trade, these costs may stack up, impact the return on your portfolio, and reduce the amount of money you have available for investment.
Mutual Fund Loads
Mutual funds are collections of investor capital that concentrate their investments in several marketplaces.
By minimising the effects of volatility, investing small amounts consistently over time in a mutual fund can provide you with the advantages of cost averaging (DCA).
Online Brokers: What Is the Difference Between a Full-Service and a Discount Broker?
Brokers are either full-service or discount. Here’s the difference between a discount and a full-service broker:
As the title suggests, full-service brokers provide a wide range of conventional brokerage services, including financial assistance for estate planning, retirement planning, college preparation, and other life events and possibilities.
Discount brokers are more popular today than in the past.
You can choose your investments and place your orders using the tools brokers provide. Many offer resources on their websites and mobile apps, which can benefit new investors.
Investing vs Trading: Which Is Better?
Traders and investors can incur unique risks, benefits, and losses.
One approach isn’t better than the other. Both are potentially productive ways to profit from international trading or investment markets.
The strategy that suits you depends on various considerations, including:
- Your familiarity with a particular market or asset class
- Your financial objectives
- The time you’re willing to put into researching and monitoring your investments
- Your risk tolerance
- The money you need to start
Trading vs Long-Term Investing
Below is a discussion of long-term investing and trading.
Traders are market players who buy and sell company shares while putting more emphasis on the market cycle than a company’s supposed financial strength.
These individuals focus on the following factors:
- Supply and demand: Traders closely monitor their intraday trades to comprehend money flow
- Market makers: Market makers are employed to produce liquidity through quick trading
- Price patterns: To forecast future price fluctuations, traders look at the stock price history
Here’s a list of trading approaches you can implement to minimise your risks:
- Create a plan that outlines the timing of your purchases and sales. Set a certain amount to indicate when to start and stop a position.
- Evaluate both immediate and future capital gains.
- Adhere to your plan. If you’re new to investing, even a small change in your stock holdings’ principles can significantly increase your risks.
Is Trading a Good Idea? Pros and Cons of Trading and Stock Picking
Short-term trading poses risks, just like most activities people do in life.
However, you can minimise risks and optimise potential gains if you understand the basics and work with a reliable broker.
Below are things to consider regarding trading.
No Day Trading Requirements
Some markets have minimum capital requirements or cap the number of day trades you can execute from a given account.
The market does not adhere to these restrictions. Thus, traders and investors are permitted to engage in day trading.
Various Trading Opportunities
You can trade various financial instruments, including FX, indices, metals, equities, currencies, and commodities.
Risk vs Return
Even if a company has yielded massive returns, you can only profit if you buy and sell at the right moments. Recall that stock prices don’t always rise.
It is impossible to determine exactly how markets will respond to changes in the capital markets, which is one of the reasons why it’s challenging to choose the ideal moment to purchase and sell stocks.
Tax usually affects day trading with a brokerage account. Trading is easy with few clicks, but the tax implications aren’t always obvious.
Short-term capital gains can cause you to fall into a higher tax rate and affect your ability to claim certain tax credits or deductions because it’s taxable, like income.
Buying and keeping a portfolio of stocks, mutual funds, bonds, and other financial assets allows you to increase your wealth over time gradually.
Pros and Cons of Long-Term Investing
Long-term investing isn’t easy. Therefore, it is essential to make a plan, follow it, and take on the amount of investment risk required to achieve your objectives.
Consider the following if you plan to invest:
Many people have the impression that to retire early or achieve financial independence, they must invest quite aggressively. However, reducing volatility is crucial for achieving financial objectives.
The fear of missing out or FOMO is one of long-term investing’s significant drawbacks. It’s tempting to think, “if only I…” when picking stocks or reading about the rise of Bitcoin.
Tax Planning Opportunities
Additionally, long-term investing can provide tax planning alternatives that are ordinarily not available with a stock-picking strategy.
If you don’t constantly trade, your portfolio turnover may decrease, which can help you pay less in taxes.
Moreover, you can work with financial experts. They can help minimise the tax impact when you need to sell a fund by selecting particular lots or tax-loss harvesting.
Financial Planning and Projections
Financial predictions are made possible by following established investment principles since the range of potential outcomes is less ambiguous.
Most long-term investing strategies evaluate the performance of asset classes under various market conditions and the probable range of returns and losses using historical data, correlation, and trends.
This data enables you to test your financial plan to make decisions with greater confidence, such as when you have enough money to retire.
How Do Commissions and Fees Work?
Clients typically pay commissions to brokers for each trade. These charges can exceed $10 for each trade.
Traders believe it is prudent to keep their overall number of trades to a minimum to reduce their exposure to commission charges.
Rise of Apps
A mobile app can access some of the latest investment trading services.
Many traditional desktop investment platform companies have created trading apps for users to keep up.
A user of an investment app shouldn’t only pay attention to fees.
Stock Market Simulators
A stock market simulator can be a helpful tool for people new to trading who want to practice without risking their own money.
A vast selection of trading simulators is accessible, both paid and free.
Users of stock market simulators can invest fictitious, virtual funds in a portfolio of stocks, options trading, exchange-traded funds, or other securities.
These simulators often monitor changes in investment price along with additional noteworthy factors like trading costs or interest rates.
Investors can carry out virtual transactions as though they were engaged in actual transactions.
Users of the simulator can also learn about investing through this approach and experience the effects of their hypothetical investment selections without risking any of their own money.
Beware of ‘Indiscriminate’ Trading
The opportunity to trade rapidly and, if you choose the proper supplier at little to no cost, are two critical draws of investing via an app.
What Are the Risks of Investing?
Investing is a commitment to put money down today to achieve a financial goal.
People classify risk into various categories, with some financial products and asset classes being intrinsically considerably riskier than others.
Risk is an unavoidable aspect of all investing. There’s always a chance that your investment’s value won’t rise over time.
Therefore, how to manage risk to accomplish financial goals, whether short- or long-term, is a crucial factor for investors to take into account.
When Investing or Trading, Make Decisions for Your Goals and Risk Tolerance, Not Someone Else’s
Today, it’s simple to become engrossed in the markets. Every day, a news outlet publishes news about a stock rising in value or cryptocurrency millionaires.
Consider your risk approach when selecting how to divide your funds between trading and investment. Think about your financial situation, goals, and the potential loss impact on your finances.
What Is Trade Investment?
Trade investments are those that people make to maintain a business.
Who It’s For
An investor can make security deposits with a company to acquire an agency or dealership.
- Crypto assets: This term refers to a digital asset secured by cryptography that you can electronically transfer, keep, and trade.
- Diversification: Using this strategy, you distribute funds among numerous investments to reduce portfolio risk.
- The exchange-traded fund (ETF): This investment fund attempts to follow a specific market or index
- Fundamental Analysis: This analysis entails examining all pertinent data regarding an asset.
- Going long: This phrase means buying an asset.
- Going short: This phrase means selling an asset.
- Leverage: When opening a position, this term refers to borrowing money from a broker to boost the future return on investment.
- Market risk: This risk that the whole stock market falls
- Risk: This is the amount of capital exposed on any single trade
- Risk management: This term means concentrating on risk when trading to reduce losses
- Specific risk: This is the risk connected to a specific asset
- Stocks: These investments represent ownership in a business.
- Technical analysis: This type of analysis focuses on price charts’ patterns, trends, and indicators.
- Time horizon: The period investors expect to invest
- Isn’t trading risky?
Every financial activity has some risk. However, with the appropriate risk management approach, you can reduce the risk of losing your initial investment.
- Can I quit my job because I can trade? How much time do I need?
You can use trading as a long-term wealth-creating financial strategy while working a full-time job.
You don’t have to leave your career because trading can give you this option over the long run when done correctly.
- What is social trading?
Social trading enables traders, particularly newcomers, to view or copy the trading tactics of more experienced traders.
- What strategy will suit me best?
Trading and investment strategies can vary depending on your style and financial situation.
Placing a high value on your risk tolerance is excellent trading and investment advice.
- How do I know this trading option is not a scam?
You can feel secure knowing that you are trading in a regulated environment because when trading with a regulated broker, like Taurex.
Taurex is approved by the following institutions in different locations:
- United Kingdom: Financial Conduct Authority (FCA)
- Seychelles: Financial Services Authority (FSA)
- Sierra Leone: Central Bank of Sierra Leone
- United Arab Emirates: Dubai Financial Services Authority (DFSA)
For added security, we split the deposits made on behalf of our clients at tier-one banks.
If you have questions about trading, you can contact our customer support team via phone, email, or WhatsApp.
- What must I do to learn how to trade?
You can register and fund an account, choose the market you wish to trade in, and do a complete asset analysis after you are comfortable and aware of the risks.
- Who is called an investor?
Any individual or organisation that commits capital to a business expecting to receive sizeable financial returns over the long term is considered an investor.
- What are the types of traders?
The three types of traders are noise, convergence, and long-term value-based traders.
- Which strategy involves more risk, trading or investing?
Trading may have a higher risk-to-reward ratio and involve greater risk than investing. Since investing is a long-term project, it may carry less risk than trading.
- Which option earns more profit, investors or traders?
Both investors and traders can profit. However, traders typically outperform investors when they make the proper decisions and the market responds as expected.
- What’s the difference between investors and day traders?
A day can contain hundreds of trades, which day traders frequently perform. Meanwhile, investors choose a slower strategy and may keep stocks for months or even years.
- Is trading a good investment?
Trading can be a very successful investment if it is well-planned, performed, and consistently profitable. It has the potential to generate significant returns.