Understanding the Difference Between Trading and Investing

In this article, we are going to talk about the differences between trading and investing. They are wide-ranging however, they are both good ways of potentially making financial gains on the global financial markets. Similarly, both investors and traders seek to gain from global financial markets. Although, they use different ways to realise their objectives.

Ultimately, an investor aims to gain from the market over several years whereas a trader’s aim is to make gains from the financial market over days weeks or months. A trader looks to benefit from the movements of the financial market to achieve smaller gains but more regularly. An investor’s objective is to profit by buying and holding, aiming to make a greater profit on transactions over time.

The Difference Between Trading and Investing 

The difference between trading and investing is that a trader frequently buys stocks, currency pairs, commodities, and any other financial instruments. Therefore, he then sells them at a higher price in order to gain from the increase in their value. In fact, a trader may do this many times during the day to achieve the desired return. A trader usually aims for a monthly return of around 10%. An investor aims for a 10% to 15% return per year.

Financial gains in trading are made by monitoring market movements over short time periods. These gains are made by purchasing at low cost at the early stages of the market gradually moving up. 

In addition, when a trader believes the asset value is about to drop, he will trade the asset at a higher value. He/she has the intention of purchasing the same asset at a lower price to profit from the market’s fall, again over a short time frame.

Protective actions in trading such as stop-loss orders can be implemented to avoid losses up to a pre-stated price level. This is done by setting the trading platform to end negative positions at a certain point. To obtain the highest possible profits and the smallest possible losses within a particular time period. In other words, traders use technical analysis, such as graphs, moving averages and stochastic oscillator indicators to identify and plan for potentially lucrative trading opportunities.

Trading Styles

In this paragraph, we’re going to talk about trading styles. A trader’s approach can be identified and their style summarised based on the period in which stocks, commodities and other financial instruments are traded:

• Position Traders: positions held over the medium to long term (for several months or years).
• Swing Traders: positions held over the short to medium term (for several days or weeks).
• Day Traders: positions entered and exited over the short term (usually within the same day).
• Scalpers: positions entered and exited near enough immediately (within minutes or seconds).

Investors

Firstly, an investor has a more careful investment strategy than the risk-focused day trader. They focus on long-term returns, keeping a hold of and profiting from investments over many years.  These provide long term returns. Secondly, investors also benefit from lower trading costs, stock splits, dividends, and interest over the years. Market volatility should not be hugely concerning for an investor. The focus is on making long term returns. Finally, an investor is not preoccupied with technical analysis. They observe general indicators such as P/E ratio, management forecasts, and company value. 

Investing vs. Trading – The Key Differences

In this paragraph, we’re going to talk about the key differences between investing and trading.

• Time period: trader’s look to the short term time periods which can be seconds, minutes, days, or weeks. Investors look to the long term, building up and holding onto a portfolio over many years.
• Market changes: trading is high risk/high profit. Using the short-term rise and fall of the financial markets to make gains from these market movements. An investor is not concerned with these price movements. They look to the future long term prospects of an investment.
• Trading abilities: investment requires a steady vision for future development to make long term profit in the financial market. Benefiting from interest and dividends on investments over time. A trader skillfully makes gains by keeping a close eye on sometimes volatile market movements. They profit from very short term timely buying and selling of investments.
• Risk: a day trader thrives on risk. They aim to make high gains over very short lengths of time.
• P/E ratio, management forecasts, and company values have priority.

Conclusion 

We hope this article has made you more comfortable knowing the difference between trading and investing. Understanding these key differences allows prospective traders and investors to formulate their trading plans and identify what traits match their own personality. SquaredFinancial is a market-leading broker and offers endless trading possibilities. SquaredFinancial provides access to numerous ‘Contracts for Difference’ enabling easy trading of commodities, forex, stocks, indices, and futures. 

Sign up for a free trading account that comes with access to a state-of-the-art trading platform to explore all your trading and investment needs! Or if you are looking to learn more about trading visit our education center here.