Trading involves more frequent transactions, such as the buying and selling of stocks, commodities, or other instruments. The goal is to generate returns that outperform buy-and-hold investing. While investors may be content with of 10% to 15%, traders might seek a 10% return each month. Trading profits are generated by buying at a lower price and selling at a higher price within a relatively short period of time. The reverse also is true: trading profits can be made by selling at a higher price and buying to cover at a lower price to profit in falling markets.
While buy-and-hold investors wait out less profitable positions, traders seek to make profits within a specified period of time and often use a protective stop-loss order to automatically close out losing positions at a predetermined price level. Traders often employ technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups.
A trader's style refers to the timeframe in which stocks, commodities, or other trading instruments are bought and sold. Traders generally fall into one of four categories:
The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds, and other investment instruments.
Anyone who has a 401(k) or an IRA is investing, even if they are not tracking the performance of their holdings on a daily basis. Since the goal is to grow a retirement account over the course of decades, the day-to-day fluctuations of different mutual funds are less important than consistent growth over an extended period.
There are several differences between trading and investing, but the most popular differences are the investment approach and the time involved.
The critical difference between investing and trading is the type of approach involved in both methods. In investing, the investor uses the fundamental analysis of the company, and in trading, it involves technical analysis.
Fundamental analysis involves the company's financial analysis, previous financial records of the company, analysis of the industry on which the company is based, and the overall performance of the industry based on the macroeconomic situations in the country and the results.
Technical analysis is everyday financial trends such as the company's performance in numbers based on the uptrends and downtrends in the market every day. It requires the traders to study the company closely and every day as it makes financial decisions and reflects in the charts and numbers in the stock market. This data helps the traders to make significant predictions of the changes and involves studying trends in volume, price, and moving averages.
Traders need to act dynamically and buy or sell based on the current trends while investors study the company closely, invest in it and hold it for a longer period to earn profit with lesser risk.
Time-Based and Risk-Based differences between Investing and TradingThere is a difference in time involved in both the market-based money investments. Investing involves studying the company closely and holding it for a longer period with the expectation that it will return profits in the long haul; this type of investment involves lesser risk and may incur not huge profits but are relatively safe to the market trends. A classic example of "investing" is mutual funds and involves lesser risk and lesser profit. Other examples are bonds or baskets of stocks for long holding positions. The time frame can range years together and is less dynamic. The trend in the market that lasts for a shorter period does not make any difference to the investors.
Trading studies the companies closely with everyday trends to predict the future change on which they could earn better profits. This is a short-term investment and can involve buying and selling within a single day, weeks, or months based on the market situations. It is a high risk-reward ratio as the market is volatile, and one wrong decision can incur huge losses. A classic example of trading is the basis of the stock market, where the trader buys a certain number of stocks when the prices are low and sells them when the prices are high to generate huge profits. This time approach not only allows the traders to make quick transactions but also earn more compared to the long-term investors.
Final words
The major differences between investing and trading are approaches, risk, and time involved. It is okay to do both, and it depends on the risk-taking ability and patience of the person to choose between either of these or both of these. Investing is long-term and involves lesser risk, while trading is short-term and involves high risk. Both earn profits, but traders frequently earn more profit compared to investors when they make the right decisions, and the market is performing accordingly.