Investing vs Trading: What’s the difference?
Are you a trader? Or an Investor? We may hear this question a lot, but oftentimes we may mistake the two for the same thing. It is one of the most popular questions seen on articles, blogs, and forums just like the Empire27 forum, that beginner investors tend to seek. And while the two terms can be used interchangeably depending on the situation, the sole difference is the method.
Whether you trade stocks, invest in cryptocurrencies, or both, then you are here to learn the difference between investing vs trading.
Disclaimer: This article is for entertainment and educational purposes only. The author’s views and opinions should not be taken as financial advice.
Investing, in simple terms, is the expectation of a return of income through price appreciation. It’s the act of allocating your money towards resources with the hopes of generating some profit later on. You can invest in assets, businesses, and even real estate properties that can sell for a much higher price in the future. However, there is a chance wherein an investor may risk losing some or even all of their capital invested if they are not careful. Before one makes any investment, it is wise to first study and calculate all the risks involved. Here are some approaches you can try when you start investing for the first time.
Different Investment Approaches
- Buy and Hold
- Dollar-Cost Average
- Active Investing
Buy and Hold
The “Buy and Hold” method is the simplest form of investing. The idea behind this passive approach is that no matter when or how much the price was when you entered into the market, the long-term yields should triumph against the short-term movement of the market. Basically, it’s buying, and waiting for the price to appreciate in the next 5 or even 10 years. It takes a lot of commitment. However, the benefits of holding for increasingly long periods of time will often result in spending less time worrying and constantly looking at the market or even spending enormous amounts on trading fees.
Dollar-cost averaging or simply called, DCA is the method of investing where one makes regular investments in the market over time. So rather than buying a certain stock or commodity at one price, you are averaging your entry into the market by investing an amount every month, rather than all at once.
Active investing is known as trading. It requires you to monitor the market at smaller timeframes, day in and day out. Therefore, trading is a form of investing actively rather than just waiting or holding. Traders enter and exit the market within a timeframe to make small profits. The underlying theory behind trading is that in the long run, these small profits may compound into huge profits.
In the next paragraph, we’ll discuss more about trading, and some of the types of traders.
Before one can become a profitable trader, one must understand how to read price charts.
If Investing is for long-term purchasing and holding of assets, trading, on the other hand, is making a profit out of short-term price movements and being actively involved in the market. That is why it is crucial for a trader to understand the fundamentals, and technical analysis of a stock, commodity, or currency before entering. In trading, timing is everything. The basic principle for a good trade is “buy low, sell high”. After a trader has made a profit from short-term movements, they will close their contract or position, (often within a day) then open another one the following day. Let’s look at the different types of traders below.
Different types of traders
- Swing Traders
- Breakout traders
- Retracement Traders
Scalpers are also known as day traders. A scalper is a type of trader who closes the trade on the same day whether they profit or lose. They will buy or sell within a price range of the market and exit before the market closes. It takes a lot of discipline and careful timing to make a good profit.
Swing Trading differs from Scalping. You can scalp several times within a swing trade. But normally, swing trading takes a minimum of 1 to 3 weeks.
There are those who trade only when there are specific patterns occurring in the price charts. Oftentimes these patterns are recognizable and you can profit out of them. For example, when a price breakout of a certain price range, it will have a markup or markdown. This is when the trader will enter a position and again make use of the short-term volatility. This is usually a very aggressive style of trading and it will require lots of studying on charts and price analysis beforehand.
Before a price can make a new “high” there will be a low. On the contrary, before the market makes a new low, it will first go high. This is the basic principle of trading with retracements. Price rarely ever just goes up or down, it oftentimes fluctuates and retraces back into previous key areas. Making use of these areas and entering and exiting the market based on these concepts are called retracement trading.
In summary, we learned that the difference between investing and trading boils down to how long we are staying in the market with investing having long-term goals, and trading, profiting from short-term trends in the market. Now that you are more knowledgeable in what type of investor you want to become, it’s time to learn what types of investments one can make.
Common types of Trades and Investments
- Mutual Funds
- Retirement Funds
The most well-known type of investment is stocks. When you buy a stock, you are buying an ownership or certain share of the equity of a publicly-traded company. These include many of the biggest companies like Amazon, Apple, Facebook, Tesla, and so on. However, the risk is also that the stock price of a company may go down due to bankruptcy, or poor performance. If there is a promising brand or company you would like to invest in, make sure you do some research about them first.
Bonds are typically a less risky investment than buying stocks, however, the rate of return is much slower compared to the latter. When you buy bonds you are essentially lending money to someone. In return, you make money through interest payments. The contract usually ends when you’ve held the bonds for a certain amount of time. Only then will you get your investment back.
Mutual funds are those that investing companies usually offer. They are a pool of many investors that each invested money in a number of companies that are offered by the managing firm. Usually, they are managed by a fund manager. These fund managers select securities or commodities that potentially will perform well, oftentimes diversifying your money and allocating them towards the known top-performing assets. An investor can profit from these bonds they invested in when the value of the stock goes up. If you’re interested in mutual funds, you may seek more information about them by talking with your financial manager, or applying in your local bank, or investing firm.
Commodities are those physical products that you can invest in. Traditional types of commodities include gold, silver, oil, and natural gas. However, investors should make sure they thoroughly understand the risks before investing in them – partially because investing in them comes with the risk that the price may move abruptly in either direction due to sudden events like political actions or natural disasters, which can greatly affect the value of a commodity being traded.
Crypto is a fairly new investment option that a lot of traders have hesitated to invest in during its early stages. However, cryptocurrencies today have been regarded as a legit investment option. The most famous of which is Bitcoin. Basically, cryptocurrencies like Bitcoin are a form of digital money that’s being stored on an encrypted code. You can trade Bitcoin and other cryptocurrencies in crypto markets and exchanges.
Each type of investment requires different levels of skill and practice, so it might take some time before you can be profitable. Before you trade or invest, it’s best to consider each type first and adjust based on how much you are willing to risk, rather than how much you want to earn.