Main Differences Between Investing and Trading Explained
A farmer will go purchase seeds from a seed vendor with the sole purpose of sowing them in order to make a profit after a period of time.
The usual risks with his craft remain constant, including change in weather patterns, pest manifestation and many more.
The same situation applies to trade and investment as in spite of their difference, they are both ways of amercing wealth or generating profits in the financial market.
The seed vendor gained quick profits whereas the farmer took the buying and holding principle.
Many people freak out when they hear the words trading and investing.
Traders use a multitude of jargon words to confuse potential investors into thinking it is only for the selected few. To them, the financial markets are already competitive enough.
This tactic of theirs has since been demystified and more and more people are dipping their toes into the cash cow.
While investing and trading sound like the same thing to most people, they are quite different.
For starters, investing works under the principle of buying and holding of stock, bonds mutual funds among other mutual investment instruments.
Trading, on the other hand, incorporates frequent transactions of stock, commodities and other trading instruments.
To get a deeper understanding of the key differences between trading and investing, we have highlighted them below.
Trading involves holding of stock for a short period which may be in weeks or months as the trader keenly observes the market trends for a short term high performance.
Investing, on the other hand, involves buying and holding of commodities.
Investors invest their money for longer periods such as a year or decades.
A trader watches emerging market trends which include the price movement of stock.
When the value is higher than the previous one, they could opt to sell their stock for quick profits.
The timing of profits is an opportune strategy. Investing, on the other hand, involves compounding of interests and reinvesting in quality stock in the market.
Risk is implied in your capital by both trading and investing.
Quality stock investment is not affected by daily market cycles over a longer period.
Investing takes a while to develop. It comparatively involves lower risks and lower returns. It may, however, deliver higher returns over a long period through the compounding of interest and dividends if held for long.
Trading, on the other hand, involves higher risks and higher returns as the prices may go up or down in a shorter period.
Strategy (Art And Skill)
Just as is in rugby, trading is like a rugby match final whereas investing is like a test match.
The art of the game is witnessed in the test match since the coach analyses the team performance all through as they build up the skill of the players.
Similarly, as investors, they would learn the fundamentals of business and be committed to staying invested for a longer time.
Traders, on the other hand, are skilled individuals who study the market trend and strike immediately for results which are profits.
The goal of trading is more aimed at generating more returns over buying and holding investment.
Trading involves buying for low and selling at a higher price.
While Investors might be contented with a 10 to 15 percent annual return, a trader is eager to seek a 10 percent increase per month on his returns.
The wealthy and the rich are a perfect example of traders and investors.
Traders generate returns by buying and selling of shares and make instant profits.
Investing steadily builds wealth over a longer period through buying and holding of investment instruments.