Differences between investing and trading explained
These terms are familiar to anyone reaping a profit on financial markets. They are not interchangeable and should not be confused with one another. Why? Several features are accounting for the distinction, and the nature of the gains is, perhaps, the main one. Here is a brief guide to help you tell the difference easily.
Fewer people outside the financial sector, however, could define trading. However, everybody knows what investment means in layman’s terms. You spend money buying property or shares, for example, and wait for the assets to gain value. Meanwhile, you may be getting regular interest or dividends on the invested amount. When the value of your assets shoots up, you sell them and benefit from the price difference.
Investment: What it actually means
Basically, investing normally implies long-term goals. An investor acts more conservatively and less energetically. Their sources of profit are capital growth or dividend yields brought by the stock they hold in their hands.
Let’s take commodities as an example. Investment in this kind of stock may bring losses if the price for the commodity – say, crude oil or gold – falls. On the other hand, there is a way to protect oneself against such negative finance dynamics. If the listed producer of the commodity secures long-term hedge contracts on its output, the risks are lowered. This way, the commodity price gets locked in for some time, letting the producer stay profitable in spite of the drop.
Time makes a difference
Investors purchase stock and then wait for it to bring gains. This period is lengthy in comparison with trading, which is faster. This explains why the method is often referred to as “set and forget” or “buy-and-hold”. Any temporary market fluctuations generally bear little significance for an investor, who thinks in terms of long-term profits.
Traders, on the other hand, are not inclined to wait for years. They intend to reap profits quickly, based on their shrewd timing of each deal. Usually, they will only hold their stocks for a brief period, expecting high performance over days or weeks. They gain from buying low and selling high (these actions are referred to as “buying the dip” and “selling the rally”, respectively).
Sources of profit for traders and investors
Traders buy and sell stocks depending on the related price dynamics. For example, participants of Alpari Forex trading monitor the changes in the value of different currency pairs, and either sell or purchase foreign currency accordingly. Hence, the results of their activity are determined by the ability to time transactions well, given the short-term nature of the gains.
As regards investment, it is centred on long-term gains, on building up wealth through the years or even through decades. The profits here depend on interest and dividends connected with the stocks and shares held.
Risks considered by both groups
Both trading and investing may entail considerable risks, especially for newbies. Success in the stock or foreign exchange market requires thorough analysis and knowledge of the system and its inner workings. You can hardly rely on luck alone. On the other hand, the benefits you may get can be immense.
Generally, the higher the risk, the higher the possible returns. And when it comes to risk, traders are much more daring. Investors tend to accept the lower risk and lower earnings in the short term for the sake of higher returns afterwards – sometimes, in years. In situations when stocks are held for extended periods, increases of interests and dividends may bring considerable gains.
The difference in mindsets: Technicals against fundamentals
There are many factors a trader needs to monitor to succeed. What makes a trader a real professional is a set of skills specific to the occupation. They can conduct accurate technical analysis and assess market-related time frames well. A trader must learn about momentum, and conditions for higher returns within the stipulated time.
Ultimately, it all comes down to the psychology of the market. Simply put, traders are more into the technicalities, while investors rely on fundamentals. They tend to analyze the stocks meticulously and are focused on staying in the investing business for longer periods.
In conclusion, investment opportunities are best suited for people wishing to make a profit whilst avoiding huge risks. On the other hand, traders enjoy the thrill of market speculation, and they are action-focused. These people do not mind occasional losses as long as they still keep making money.