Trading and investing both have their merits, but the two strategies don't always go hand in hand.
It's important to understand the differences between trading and investing so that you can make the best decision about how to approach your chosen market.
We'll walk you through this in a friendly way, without getting too technical - so stick with us!
1. Investing and trading are two very different ways of approaching the markets.
As a general rule, investing is a long-term approach that seeks to maximize returns over the long term. Traders, on the other hand, are concerned with price action and holding positions for shorter periods of time.
Investors seek assets whose prices have already proven themselves to grow over time—such as stocks that pay dividends or bonds issued by governments or corporations in highly stable economies.
2. Trading is oriented towards short-term opportunities in the markets where investing is more aligned towards growing capital over long periods of time.
Traders are discipline-oriented and focused on short-term opportunities in the markets. Their focus is on price action (volatility) and how much total return an asset will generate for them over a specific period of time, rather than whether it is likely to increase or decrease in value over the long term.
In contrast to trading, investors tend to focus more on how much total return an asset will generate for them over a specific period of time.
For example: An investor may purchase shares in Apple Inc (AAPL) because they believe that its stock price could increase from $150 today all the way up to $250 in a year. If the investor's prediction comes true, then she would have seen her initial cost basis (the amount she paid for her AAPL shares) increase by 35% after holding onto those shares for just one year.
Eventhough most traders tend to have shorter-term investment horizons, some traders do successfully manage portfolios with longer time: they may look at fundamentals such as sales growth potential instead of checking only technical factors like momentum indicators.
3. Traders tend to focus on price action, while investors are more concerned with how much total return and asset will generate over a specific period of time.
Both investors and traders require different skill sets: while investors like to buy low and sell high, traders need to day trade their favorite stocks regularly—sometimes even several times per day—in order for their trades to bring them profits through high to low commissions charged by many online brokerages.
Traders tend to be focused on assets that have rapid movement (e.g., exchange-traded funds, currencies, futures contracts). They are usually concerned with the immediate price action of an asset and how it affects their portfolio.
Investors tend to focus on assets that have proven growth over time (e.g., blue chip stocks). They are usually more concerned with the total return of their portfolios over time rather than just how something performs in one particular day or week.
4. You can trade and invest at the same time -just remember the differences between two approaches!
Simply note that: investing and trading both require enormous amount of knowledge about how the markets work.
Trading is all about making a profit from short-term price changes in a market. You can trade with either stocks, commodities (such as gold and oil), or currencies, often with small amounts of money; sometimes even just $100 per trade!
Investing involves buying an asset that's expected to increase in value over time because it's fundamentally strong (not just because of last week's news!). To invest wisely you need an understanding of how each stock or commodity works, including what makes them unique from one another so you can choose which ones are best for your portfolio.
Note that trading requires even more knowledge, practice, and expertise than investing. The only individuals who should be trading are professional traders with years of experience. Until you gain this knowledge and experience, you should know that you'll make a lot of loss during the journey of trading.
Trading is much more active, and can be done on assets such as stocks or futures contracts.
Investing involves buying ownership stakes in companies over long periods of time (e.g., a year, decades) with an expectation that these companies will continue to grow their earnings into the future.
As an investor or trader, it's important to know whether you are trading or investing...and if so, how much of each activity should be included in your portfolio?
Just check our next posts!