Investing versus Trading

Investing and trading are very distinct methods of seeking profits in the financial markets. It could refer to stocks, mutual funds, bonds, and other investment instruments.

GOAL

The key difference is that investors aims to build wealth through buying and extended period of holding while traders aims to generate returns through take advantage of both rising and falling markets. They also enter and exit positions over a shorter timeframe.

BELIEF

Investors trust that fundamentally sound companies will continue to do well and benefit from both capital and dividend gains. Traders are less concern with the well-being of companies and trust that profits are potentially awaiting to be taken off the table in both directions.

PROFIT

Investors buy at low prices with the intention of receiving dividends and reinvesting profits to accumulate fundamentally sound stocks. Traders buy at low prices and sell at high prices, and vice-versa, with the intention of locking down price movement gains.

PERIOD

Investors tend to be in the market for years or even decades. Traders tend to stay in the market for seconds to several months, depending on their trading style

  • Scalp Trader: Several seconds to minutes with no overnight positions.
  • Day Trader: Throughout the day only with no overnight positions.
  • Swing Trader: Days to weeks.
  • Position Trader: Months to years.

RETURN

Investors may content with annual returns of 10% to 15%. The goal of traders however is to generate returns that outperform buy-and-hold investing. Traders may in contrast seek monthly returns of 10%.

TOOLS

Investors typically concern themselves with Fundamental Analysis – market fundamentals such as price/earnings ratios and management forecasts. Traders typically concern themselves with Technical Analysis – technical analysis tools to find high-probability trading setups such as moving averages and stochastic oscillators.

STRATEGY

Investors often hold positions, sometimes unprofitable ones, for an extended period of time. Interest, dividends, and stock splits are taken into account for wealth building along the way. Traders generate profits by buying at a lower price and selling at a higher price within a relatively short period of time, to profit in falling markets.

PROTECTION

Investors welcome market fluctuations and “ride out” downtrends with expectation that prices will recoil as part of the cycle and losses will eventually be recovered. Traders seek profits within a shorter timeframe and often use protective stop-loss orders to automatically close out losing positions at predetermined price levels.

Conclusion

Both investing and trading involves risk on your capital. However, trading is comparatively higher risk (and potentially higher returns) as prices may fluctuate in a short while. Investing is comparatively lower risk (and potentially lower returns) in a short while but may deliver higher returns if dividends is reinvested and interests compounded.

Both investing and trading require serious time commitment to research and create a working strategy that works. You need to learn how to implement your strategy effectively and not allow emotions or sentiments to kick in. However the skill set for either could be quite different. The emotional discipline, patience and risk management could be further explored by the individuals who intend to step out for each path.

Do you invest, or trade?

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