Trading VS Investing

In the financial world, there are two main ways to make money on your investments: trading and investing. It’s not easy to know the difference between the two if you don’t work in finance, but it’s important to understand the nature of both in order to make sure that you manage your money properly and keep it safe from risk. Let’s take a look at what you can expect when you trade versus when you invest so that you can be sure to make informed choices about how you handle your money.

Trading - Definition

Trading refers to buying and selling stocks, bonds, commodities, currencies or other financial instruments within a short period of time in order to profit from daily price fluctuations. The risk associated with trading is relatively high. In fact, if you trade a stock and it doesn't go up within two days, your losses will outpace your gains. If you trade an option that doesn't expire until next week but its stock value decreases by half tomorrow—and again tomorrow—you'll still be stuck with an option that's essentially worthless. Trading requires almost constant attention, making it difficult for traders to also manage their personal finances or spend time with family members.

Trading – Advantages

Trading carries with it a certain level of risk. You can potentially lose all of your invested capital in just one trade. Despite that, there are some key advantages to trading: Trading allows you to take advantage of short-term price movements. If a company has particularly bad news released, you might be able to buy shares cheaply at first and then sell them after their value has risen again when investors realize that bad news isn’t so terrible. Short term trades give you plenty of opportunities to make money quickly, though they can also cost you equally as much if your predictions are wrong.

Trading – Disadvantages

Trading stocks, commodities or futures involves high risk. The possibility of losing more money than you put into a trade is extremely high. Additionally, many beginning traders fail to learn basic money management techniques before jumping into it. Trading can be very exciting, but also very boring at times. Because of its risk factor, it may not be advisable for new investors as they are likely to lose their hard earned money.

Investing - Definition

Investing is for those people who have a very long term time horizon, but don’t want to take on much risk. An investor has a portfolio of stocks, bonds or other assets that can potentially increase in value over time. The most important thing to remember about investing is that while you are hoping your portfolio will make money, there are always underlying risks (like inflation or recession) that could cause your investment to lose money. If you are looking to invest money in real estate, public equities (stocks), or private equities (businesses) -- you’re an investor.

Investing – Advantages

Long-term approach: You can invest with a time horizon that matches your investment philosophy. For example, if you’re an aggressive investor who likes to take risks, then you can focus on investments with high potential returns but also high risk of loss. If you’re conservative investor who prefers moderate gains in a low-risk environment, then look for investment options with lower potential return but higher certainty of outcome.

Investing – Disadvantages

Investing in stocks means taking on a lot of risk, but it also requires you to take time out of your day to do research. If you have a full-time job, or lots of other responsibilities, there are lots of things that can prevent you from keeping up with what’s going on in your portfolio (like if stock prices fall at 3:00 pm). Investing is also a long-term commitment; it takes time to see results. You need to be prepared for years before you see an improvement in your wealth. Being an investor takes a lot more work than most people realize. Even if someone tells you otherwise, being a successful investor takes work!

Conclusion

While there are many similarities, investments and trades differ in a few key ways. They're both about putting your money to work for you, but with investment strategies, your primary focus should be on building long-term wealth. This can be done through buying assets or researching stocks that could offer solid returns over time. With active trading, on the other hand, you focus more on capitalizing on short-term opportunities that may not necessarily line up with your larger financial goals. Trading can certainly add diversity to your portfolio and it can also help when you have limited funds to invest.