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Investing vs Trading Explained

The all-time confusion between the terms investing and trading is essential to be cleared. Investing vs. trading can be confusing for many people, however, there are many differences between both terms as each indicates a different approach to money-making.
Investing is the process of buying financial instruments, maybe across different markets, for the sake of income generation, or capital growth. It requires a long-term market view and takes time. Investors may keep their positions for years, or even decades as they are more focused on long-term growth. The stock market and real estate are two of the most traditional markets for investments.
Trading, conversely, is more based on price speculation and is a short-term approach for generating profits. Traders seek to profit from short-term price changes affected by financial and economic factors creating attractive trading opportunities for a shorter time horizon. The forex market is more convenient for short-term trading.
Neither of these methods is necessarily better or worse than the other, it depends on your level of market expertise, goals, and the time you dedicate to the market.
You might be asking yourself “Am I a trader or investor?” “How do I know which one is better?” To answer these questions about investing vs. trading, let’s take a look at three main factors:

Time frame​

A trader keeps an eye on short-term price movements, deciding when to get in and out of the market with maximum profits. By doing this over and over, a trader generates smaller and more frequent gains.
An investor is more concerned with larger profits, by holding assets for longer. The time horizon for investing is considerably longer than that of trading. Investors may buy a stock and hold it indefinitely with no time-based plans to sell. Similar to traders, investors use analytical means to determine when to enter an investment. But unlike traders, they typically have no plan to exit the market at a particular price. Hence, price fluctuations are acceptable. Investors tend to engage with market movements less frequently than traders, and often don’t engage unless they want to expand their portfolio.

Activity​

A trader is actively involved in the market by analyzing price charts and other signals to know when to enter and exit the market. Reading charts to figure out buying and selling levels is known as technical analysis. On the other side, an investor focuses on the larger picture. For example, a stock trader buys stocks only for selling them at a higher price. While an investor holds the stock with the expectations that it’ll grow in value and doesn’t intend to sell the stock even during the bad times of the market.

Risk​

For traders, short-term market risks can have a greater effect on their trades which requires more monitoring and frequent interference. Traders often use take-profit and stop-loss orders to help calculate the probability of success.
Meanwhile, investors are not bothered by daily market fluctuations as long as the long-term trend is intact. Risk management for investing heavily depends on portfolio diversification, by dividing investments across different securities and asset classes.

Investing vs. Trading: Key Differences​

Although investing vs. trading might be involved in explaining the financial markets, the comparison requires explaining the two different activities, with different goals. Thus, investing vs. trading comparisons might be somehow confusing. So, let’s explain here the key differences.

Markets​

The stock market is considered to be the main destination for investments. Stocks represent ownership in a company and can be great for growing your wealth over time. The stock market has delivered generous returns to investors over the years compared to other investments. By investing in stocks, you own a part of the company. As the company grows, the stock will deliver higher returns.
Investors usually pick individual stocks to invest in, or through ETFs. To lowering portfolio risks, investors tend to invest in other assets as well, including commodities such as oil and gold. Overall, they go for less volatile assets that promise steady returns in the long run.
Traders, on the contrary, prefer more volatile assets so that they can benefit from price changes. Unlike investors, traders speculate on the price of the asset without owning the asset itself, which is known as CFD trading. Contracts for the difference is a financial derivative through which traders can speculate on short-term price movements in the financial markets including forex, shares, commodities, and indices without having to buy any underlying assets.
Contracts for the difference are a form of derivative trading, which means they derive their value from the market performance of the asset. The value of a CFD contract does not reflect the value of the asset, only enables traders to profit from price changes.
Traders are more attracted to markets that allow for two-direction trading, which offers the ability to profit from rising and falling prices. For instance, forex trading and CFDs enable traders to buy or sell and make profits either way.
Stock trading is now easier than ever, get an edge in the stock market and to seamlessly diversify your investment portfolio with AximTrade.

Analysis​

Another distinguishing feature between investment and trading is how markets are analyzed and researched for trading opportunities. While investors typically focus on fundamental analysis, traders learn more about technical analysis.
Fundamental analysis is based on evaluating the price of an asset and assessing the factors that could influence its value in the future, including external influences.
Technical analysis is based on the study of historical price action in order to identify price patterns and predict future movements through the use of technical indicators and historic price patterns. The main tool for technical analysis is the price chart through which traders interpret price patterns. Check our Beginner’s Guide to Technical Analysis.

Objectives​

Investment is all about growing your own wealth through accumulating long-term returns. But trading can generate profits in the shorter term. Based on your objectives, you can decide which suits you the best.
You can be both an investor and a trader by diversifying your portfolio by investing in stocks, bonds, ETFs, and commodities while trading in other markets like the forex for sooner returns.

Original Article: Investing vs. Trading: The Top 3 Key Differences
Disclaimer: This post is from Aximdaily and it is considered a marketing publication and does not constitute investment advice or research. Its content represents the general views of our editors and does not consider individual readers’ personal circumstances, investment experience, or current financial situation.
 
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