The beginners on the stock exchange often get the ideas of trading and investing confused. Sometimes, being involved in speculations, they think that they are investors. And, vice-versa, buying securities for a long term, they are sure that they are engaged in trading. What are similarities and dissimilarities between trading and investing and why you should not get these activities confused, we are going to make it clear in the article.
Trading vs investing
Investing is a purchase of stocks, bonds, or other assets for a long term. Investor does not conduct frequent securities transactions. His key goal is to boost his fortune without being involved too much. As to trading, this activity is understood as active trading on the stock exchange based on short-term moves. As we can see, investing and trading are two ways to generate income from financial markets. This is the main similarity. And now let’s speak about the dissimilarities of these two activities.
As we have already mentioned, an investor buys the assets for a long term. The investment terms, depending on the strategy, vary from a year to several years, or even to a few tens of years. Trading means short-term deals. Traders may buy and sell several times a day. Thus, by contrast with an investor, a trader does not own the assets for a long time, his strategy includes short-term deals and speculation.
The investment return is calculated on the basis of annual growth. As a rule, 30% is considered a nice level of investment return. As to trading, the returns are calculated as a ratio of winning and losing trades. Annual total return of a trader may be tens times more than the return of an investor. But during this period he may lose his deposit several times and start trading again. In whole, trading allows gaining more on the financial markets compared with investing. But also this activity bears more risks.
The key income of an investor is dividends and difference in the cost of assets under the conditions of their long-term growth. Before buying the assets, an investor must conduct a thorough fundamental analysis of the market. This will help to choose the most perspective emitters. At that, you should take into account not only financial performances of the chosen companies but also the state of the economy sector which an emitter is involved in. Also you should analyze the media coverage influencing a market behavior. Economic calendar is considered to be one of the tools of fundamental analysis. This is a service which, actually, is an aggregator of economy news. It allows geting information about the current events in the global economy all in one place. This service, as a rule, is available on the websites of brokers or on the special purpose platforms likeBristol House Corporation and OneRoyal.
As to trading, the key way to generate income is to gain from differences in prices. The trader’s challenge is to choose the right moment for opening a deal to get the best result of trading. The key tool of a trader is technical analysis which allows revealing short-term market trends. A trader, as compared to an investor, is not interested in the factors impacting a price for an asset. He is interested in the price fluctuations only. His task is to forecast the direction of the trend.
Investment, as compared to trading, is a safer way to gain. In particular, if an investor aligns with a conservative or balanced strategy. Such an approach allows minimizing the risk of losing the deposit thanks to diversification of an investment portfolio. Trading bears more risk. Trader may lose his deposit much more likely compared to an investor. The market is very volatile, especially if one trades during a short period of time. Any mistake in a trading strategy or rash deal opened in the emotion of the moment may cause heavy losses. Investors have more time to make a balanced investment decision. On a long-term horizon almost all assets have a growth trend. Even if at the current moment, for instance, the price for the stocks is falling on a periodic basis, finally their value will increase anyway.
Methods of risk management
As we have mentioned, the key method to minimize the investment risks is to diversify an investment portfolio. Investing in assets of various categories, in various economic branches, currencies, and countries, an investor can cover his losses, if the price for some assets fall, thanks to other profitable tools in his portfolio.
Traders also have the possibility to minimize their losses. They can apply stop orders to do it. In particular, a stop-loss option allows closing adverse positions when a control value is reached. This allows reducing losses and preventing the loss of the whole amount of the deposit.
Investing requires initial time spending. The fundamental analysis and choosing of the investment tools take quite a lot of time and effort. You should analyze large data volumes to choose the most profitable trend to invest or the most high-potential emitter. After buying the chosen assets, an investor may relax and feel free to some extent. There is no longer a need for monitoring the situation on the market. He can rebalance his portfolio from time to time. While trading requires much more time and attention. A trader should always be aware of the market situation because he has to make short-term deals mostly. He should track the price movements and market trends on a real-time basis which takes quite a lot of time and effort.
What should be chosen?
Both ways to make money in the stock market have a range of pros and cons. The main advantage of trading is an early income that is quite possible. Traders are focused on short-term deals and they do not have to wait until their investment brings an income. The result of a trade is viewed immediately. The earned profit can be withdrawn from an account or marketed again. Also, traders get profit in any amount without restrictions. The experienced traders may earn a lot of money by trading. Besides, the profit can be increased if they use a leverage borrowing costs of a broker. But trading requires a lot of time and effort. Traders should analyze the market situation on a regular basis to get the most trade return. At that, the market is very volatile. The situation can change every minute. In order to follow the trend, they should track these changes almost without interruption. Trading is the best way to earn for those who do not like to wait and want to get a rapid result. The necessary personal characteristics of a successful trader are analytical skills and critical thinking. Also a trader should be able to keep control of his emotions and make decisions being open minded. Trading is a rather profitable activity but it is risky. That is why if you are not ready to bear risks and start falling into panic because of the slightest changes in the market, this method is not for you.
As to investing, there are certain pros. Amongst other things, this is a relatively secure method to make money in the financial market. If an investment portfolio is developed thoughtfully and skillfully, it is easy to mitigate the loss risks. The key thing is that you should remember about diversification when you develop a portfolio. Another advantage is that investing allows getting a passive income. By contrast with traders, investors should not open trades every day and spend a lot of time on this activity. Though, initial market research, needed to make a right choice of assets, requires quite a lot of time and effort. Also, an investor has to wait for his return for a long time and that can be considered a drawback. Mostly income on investments comes within a long period of time. That is why if you cannot boast of patience, investing is not for you. Those people who agree to wait for the result for a long time and do not endeavor to obtain it right here, right now, can be involved in investment activity. Also, investing is for those who do not want to spend a lot of time on trading on the stock exchange.