Trading and investing are the core principles in terms of financial markets approach. Although they may seem like synonymous terms for attempting to grow your money in financial markets, they could not be more different regarding the strategy, time horizon or risk.
In finance, trading and investing are fundamental notions. They are essential to wealth management, they offer different types of exposure to the financial market, but they have different timings, goals and approaches, and they each target different financial objectives.
Trading refers to buying and selling financial instruments regularly, with the primary goal of benefiting from short-term market price swings. Investing, in contrast, adopts a longer-term perspective. People invest with the expectation of long-term growth. This method involves patience to cope with market dynamics while benefiting from the compounding effect over time.
How to Start Trading and Investing – Quick Guide
- Choose your strategy — Trading is about speculating on financial market underlying's without owning them, whereas investing involves taking the ownership of financial assets.
- Open an account — If you want to trade, you will need a Trading Account, while if you want to invest, you will need an Invest Account.
- Explore financial markets — From trading Forex, CFDs on Stocks, ETFs, Indices, Commodities or Crypto, to investing in Real Stocks –options are almost unlimited.
- Open and monitor your position — Use our extensive range of advanced tools to open and manage your positions.
Trading vs Investing Overview
Financial markets provide individuals with an array of options and possibilities to build their wealth. Investing and trading are the primary approaches that any individual can explore.
Before choosing between trading and investing, you will need a thorough assessment of your financial objectives, risk appetite, time commitment, and personal desires. Each strategy has advantages and disadvantages, and what works for one individual may not be appropriate for another.
Online trading involves taking advantage of short-term price swings across equities, currencies, gold, and other assets. To find out how the price of a security might change soon, you will need to research the market and adjust your position by going long or short. Buying an asset whose price is anticipated to rise over the next hours, days, or weeks is known as a long position. Selling an asset whose price is expected to drop imminently represents a short position. Subsequently, you may close the trade with a profit or a loss, depending on the accuracy of your prediction.
Investing, on the other hand, is a long-term strategy that entails buying assets whose value may rise over time. As an investor, you will analyze various assets, such as stocks, funds, or any other financial securities to assess whether their prices may rise over the next 5, 10, 15 years, or longer, and then purchase the assets with a positive perspective. Over time, assuming the asset's price increases as projected, your capital could expand exponentially. Thus, investment can help you build wealth over time, but that is not a guarantee.
Time in the Market vs Timing the Market
Time in the market vs. timing the market defines a different approach to compare these financial markets' approaches.
Although it is impossible to forecast an asset's price accurately many people still attempt to do so. A person who attempts to "time the market" is usually the opposite of someone who adopts a long-term purchase and hold strategy, in which one may initially be less concerned with price and enters the market with the goal of hanging onto his investments for a few years.
The expectation of rapid returns tempts many investors, who then proceed to employ a market timing approach. Using this approach, decisions about investments are subject to making predictions about future market trends. However, most of the time it is difficult to precisely time market moves due to their unpredictable nature, which frequently leads to lost chances or financial losses.
This hypothesis leads to the presumption that trading is riskier that investing. But it is not always the case, and bear in mind that both trading and investing involve risks.
What is the Difference between Trading and Investing
Even if trading and investing share some similarities, everyone looking to get into the financial markets must be aware of their key differences. This could help you make informed decisions about which strategies to use to potentially reach your financial goals.
Below are some key points of comparison between the two approaches:
Trading
Investing
Time horizon Frequently ranging from minutes to weeks Generally expressed in years or even decades Approach Short-term Long-term Goal Benefiting from temporary shifts in the market by going both long and short Building wealth over time through capital growth and compounding
RisksHigher risk involved due to market dynamics and leverage Lower risk involved due to longer holding time, reduced frequency of decision-making and no leverage Source of profits Buying low and selling high over a short period Long-term capital appreciation and dividends or interest Diversification Less diversification options due to short-term focus Better diversification options to mitigate long-term risks Positioning options Speculating on both rising and falling prices Suitable only for bullish market predictions Costs Frequently buying and selling incur higher costs Lower costs, due to long-term holding nature
AnalysisMainly technical analysis, focused on market trends, trading indicators and chart patterns Mainly fundamental analysis of companies’ performance, macroeconomic indicators and market sentiment Effort Trading implies a considerable effort, especially for very short-term strategies Less effort due to buy and hold for a longer period Capital requirement Smaller deposit, depending on the leverage Full amount of the position notional value
However, before you begin trading or investing, you must have a solid understanding of some basic notions:
Trading vs Investing - Assets
An asset is a financial resource that can be controlled or possessed in order to generate an income now or in the future. The notion of "asset" in financial trading and investing refers to anything that can be traded or invested in the markets, including commodities, stocks, bonds, currencies, crypto and many more.
Choosing the right assets that are suitable for trading vs investing has almost the same importance as choosing the right trading or investing strategy. Here are the most common assets that traders and investors may include in their portfolios.
Trading
Investing
Stocks
In the world of investments, stocks are the fundamental building pieces. Buying shares entitles you to ownership shares in a company that is publicly traded. As the business expands and generates higher earnings, your stock should rise in value. As a shareholder, you might even be eligible for dividend payments.
Currencies
The forex market is the largest financial market in the world, where currency trades occur 24 hours a day, five days a week. Trading currencies, commonly known as Forex Trading, involve buying one currency and selling another simultaneously, with traders typically speculating on the exchange rate between currency pairs, such as the EUR/USD.
Bonds
Corporations and governments issue bonds, which are fixed-income securities, to raise capital for initiatives. You are lending the issuer money when you purchase a bond to receive interest payments plus the principal, when the bond reaches its maturity date. Although usually their return is smaller than stocks, bonds are considered less risky.
Commodities
Commodities are natural resources or agricultural products that are grown, mined, or processed and are critical inputs in the production of food, energy, and clothing. These assets are frequently regarded as a safe haven during economic recession or as a hedge against inflation and can be purchased directly or through commodity futures contracts.
Mutual Funds
Mutual funds are investment vehicles that enable investors to pool their funds and make investments in a variety of securities, including stocks, bonds, and other assets. These portfolios are managed by professionals. Mutual funds are considered a lower-risk investment than individual equities, as they are characterized by better diversification.
Precious Metals
Precious metals are uncommon metallic elements that, besides their practical uses, are valued for their ability to hold value. From Gold and Siver, the most popular metals, to Rhodium, Ruthenium and Palladium, there are multiple options to choose from. In trading, precious metals are especially valued as a hedging against inflation and recession.
ETFs
ETFs (Exchange-Traded Funds) are investment vehicles that are traded on stock exchanges. This type of fund usually follows a commodity (like Gold), or an index, like the S&P 500 Index. ETFs tend to gain more popularity among investors due to their liquidity and diversification options at a cheaper cost.
Cryptocurrencies
Cryptocurrencies are digital assets that trade on a 24/7 global market, and they have received a lot of attention during the last decade. The most popular cryptocurrency is Bitcoin (BTC), but there are many others. Cryptocurrency trading is considered risky, as their prices can soar or fall rapidly.
Real Estate Investment Trusts (REITs)
Done right, real estate investing can help diversify your existing investment portfolio without the need to own, operate, or finance properties. Real Estate Investment Trusts (REITs) are companies that raise funds by selling shares of stock and issuing bonds to purchase and lease out real estate assets.
Derivatives
Derivatives, such as CFDs, are some of the most popular trading products in the world and can be used to hedge a position, speculate on the directional movement of an underlying asset, or leverage your exposure. You can choose between derivatives on stocks, indices, commodities, bonds, currencies, or crypto.
Investing vs Trading - Strategies
There are also various types of investing and trading styles and strategies.
It may take some time to determine which one is ideal for you, but that's perfectly normal. Make sure you research diligently for everything and keep in mind that no strategy is immune to the risk of losing money. Here are the most common ways that traders and investors approach the markets.
Investor vs Trader
Buy-and-hold investing - a long-term investment approach that does not include market timing and instead uses passive investing. For instance, you can buy securities and hold them for several years until you retire.
Day Trading - a popular trading strategy whereby an individual buys and sells a financial instrument over a time frame of a single day with the intention of profiting from intraday price movements.
Active investing - an investing strategy focused to capitalize on market fluctuations determined by sentiment change or various events (such as mergers, acquisitions or stock-split).
Swing Trading - a medium-term trading style that is used by traders who try to profit from price swings, from a couple of days to several weeks.
Growth investing - an investing strategy that involves buying growth stocks that are anticipated to grow at a rate significantly above the average growth for the market.
Positioning Trading - a popular long-term trading strategy that involves individual holding a position for a long period of time, which is usually months or years.
Value investing - an investment strategy that involves performing fundamental analysis and pick stocks that are perceived as being trade for less than their intrinsic value.
Carry Trading - a popular forex trading strategy where traders attempt to take advantage of differences in interest rates between two currencies.
Income investing - an investment strategy that is primarily focused on building an investment portfolio specifically structured to generate regular income. For example, you may invest in dividend stocks.
Algorithmic Trading - a method of executing orders using automated pre-programmed expert advisors, or trading robots.
Passive income investing - an investment strategy that is focused on assets that can provide an income stream that is automated. You make an upfront capital and then receive an ownership stake in that investment.
Copy Trading - a branch of social trading, where one trader’s positions are copied by another trader’s account when they are opened or closed.
There are many other trading and investing strategies out there. Research your choices to determine which investing or trading strategy makes the most sense to your goals, time horizon and risk tolerance.
Trading vs Investing - Finding the Right Approach
As mentioned before, your decision will mainly depend on your timetable, goals, risk tolerance, and strategy. Your preferences may already be instinctively clear to you, especially when it comes to risk and how long you want to stay committed for.
However, there's no reason why consumers of financial services can't trade and invest simultaneously. Long-term investors can increase the value of their portfolios by strategic trading if risk is limited and allocations are well-balanced, providing them with the best of both worlds.
For example, during a prolonged bear market or to mitigate currency risk on foreign assets, seasoned investors often switch to trading to hedge some of their exposure.
When is done properly, trading a small portion of a portfolio can make investors more informed and risk-aware, which is beneficial for long-term financial planning.
Trading vs Investing Pros and Cons
However, if you still want to decide and choose between trading and investing, it is imperative that you assess their advantages and limitations.
Trading
Investing
Pros Cons Pros Cons The possibility of short selling during bear markets
Higher costs associated with the number of trades Long-term growth potential and compounding effect Lower liquidity, due to long-term commitment Flexibility to adjust in response to shifting market conditions. Higher risks compared to investing Diversification that helps mitigating risks Requires patience and time (years or decades) Potential short-term profits during short-term price movements Time-consuming to develop effective strategies Reduced stress compared to trading Less opportunities during market sentiment shifts
What to Choose: Trading or Investing?
Although the required skills for each category may differ, with dedication and time, these abilities can be developed and strengthened.
Almost anyone with no prior experience in the stock market can begin investing right away because it is a straightforward process. To invest, you only need to find a stockbroker, open an account and buy the securities you think will grow in value.
On the other hand, since a key component of trading is analyzing assets' charts and patterns, it takes a little more skill than investing. Additionally, a trader should be familiar with indicators and technical analysis in general. It takes time to develop those abilities for a trader who wants himself to be successful in the long run.
Trading could be a suitable for you if:
- You are interested in a wide range of markets and assets
- You want to go both long and short
- You want to use the leverage
- You don’t care about owning the asset
Investing could be a better option for you if:
- You are comfortable paying the total value of the position
- You prefer real stocks and funds
- You want to own of the underlying assets
- You are committed to long-term holding strategies
Start Trading and Investing with Capex.com
If you have eventually decided upon trading vs investing, or both and you are ready to get started, follow these steps:
- Open an account to start trading CFDs or various underling assets or invest in Real Stocks. You'll automatically gain access to a free demo account, allowing you to practice with virtual funds.
- Enhance your understanding of financial markets by visiting the Capex Academy, that might help you find strategies that best match your approach.
- Use risk management techniques, such as placing and executing stop-loss and take profit orders, to protect your positions.
Conclusion
Both trading and investing could generate returns, but which one you choose depends on your risk tolerance and your financial goals.
Trading could involve a greater risk, particularly due to its leveraged nature, as this can amplify both gains and losses. In addition, it might not require asset ownership, involve greater liquidity, and allows short selling, which might be useful for hedging and speculation.
On the other hand, investing may require less liquidity because it entails ownership of the item. Dividends to shareholders give investors the chance to improve their returns or benefit from the compounding effect.
Understanding the key differences between investing and trading will help you choose a course that fits your financial goals and make wise choices. Or you can find the right balance and include them both in your portfolio.
Free resources
Before you decide between trading vs investing, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.
Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.
Sources
https://www.ici.org/
https://www.americanheritagecu.org/
https://corporatefinanceinstitute.com