Investing versus Trading: 3 Differences

When it comes to seeking an increase of equity extracted from the financial markets, investing and trading are two important categories within the field. However, trading and investing are two vastly different approaches to generating profits in the financial markets. In part 1, I put the focus on the psychology aspect of the two, one that is often overlooked. In this second part, let's dive deeper and let's learn about 3 key differences between investing and trading.

Timeframe

Trading is a method of holding an asset for a short period of time. It could be a week, a day, or sometimes even minutes. Traders focus more on the shorter timeframes and typically trade the markets long on increases in price, and short on decreases in price. Investors seek to invest their money for some months, but more often for years or even decades. Short term fluctuations are insignificant in the long running investment approach. An investor plans a multiyear idea carefully and, once in position, does not touch the position unless a macro opportunity presents itself to either compounding onto the position or reduce exposure.

Value and Price

Traders look a t price movement of an asset in the markets. If price goes higher, the trader may sell the stocks. When price goes lower traders may buy again. Trading revolves around the skill of being able to time the market on the shorter term. Investors however are seeking out the underlying value of the asset. They believe in the company or product and decide to back the project by investing money into it. The price that the asset is trading at is much less relevant. The investor seeks to create wealth by compounding interest and dividends over the years by holding quality assets within their portfolio.

Risk

Unavoidably, both trading and investing imply risk on your equity. However, arguably trading involves higher risk than investing. Traders are opening and closing positions on a much more frequent basis and therefore put their portfolio at risk much more often then the investor. The investor participates less heavily, and therefore, once the position runs in a favorable way, the risk becomes smaller, and often non-existent. An investor is also more focussed on balancing exposure, and generally more involved in hedging.

Is one approach more profitable than the other?

The simple answer is no. One approach is not necessarily better then the other, as small gains on a higher frequency can lead to overall large profits, whereas investing generally generates larger return percentages. Ultimately if executed well, both approaches can be equally profitable. In the end it is up to you to decide which approach suits you, your daily life, and your personality best. In all cases however, it is extremely important to not merge the two approaches together, as this will nurture inconsistent and flawed habit.

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Disclaimer:

The information provided above is not financial advice but for educational and entertainment purposes. Please do your own due diligence or consult a financial advisor before investing in any digital assets.