Trading and investing are two terms that are very different from each but often used interchangeably due to their similarities. Whether you decide to become a crypto investor or trader, it is important for you to be aware of the benefits and risks involved in both positions. This article highlights the important differences between trading and investing so you can learn about what they entail and understand which option is best for you depending on your needs.
What is investing?
Investing is a long-term strategy where the intent is to create wealth gradually over a specific period of time with the use of investment schemes like cryptocurrency, stocks, mutual funds, bonds, etc. Investments are typically held for years or even decades with the aim of yielding perks such as dividends, profits, interests, stock splits, gains, and many more.
When it comes to investments, the risk of fluctuating prices and downtrends is not involved because it is expected that the prices of assets will increase over the long term. Also, since investment is a long-term strategy, investors usually don’t have to bother about the specific downtrend as it will only last for a short period of time.
Investors are generally more worried about the market basics and not the upward or downward trends of the investments that are likely to change every day. Over the long term, investors are primarily interested in market fundamentals like the Price to Earnings ratio (P/E Ratio).
What are the types of investing?
There are different kinds of investing styles that are practised generally by investors. As a potential investor, it is important for you to understand the wide categories so that you can select your own investing style and put it to use.
1. Active investing
Active investing simply involves the use of portfolio managers or fund managers to manage an investor’s cash on their behalf. Usually, they charge a fee for these services. Essentially, in this strategy fund managers actively buy and sell assets while hoping to make profits and surpass a benchmark or index.
2. Value investing
Value investing is a type of investing where investors decide to invest in already existing strong and well-established firms. Generally, investors are cynical about exposing their capital to a high-risk position so they judge a company by their solid historical performance to look for more stability.
3. Passive investing
Passive investing is a strategy that involves tracking a market-weighted index or portfolio. Essentially, it is a buy-and-hold portfolio strategy used mainly for long-term investment horizons, with just minimal trading in the market.
4. Growth investing
Growth investing primarily involves more risk as investors who engage in it generally seek for higher interest on capital via their investments. Investors who use this strategy generally invest in organizations that show indications of above-average growth,
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What is trading?
Trading is a volatile and short-term process that simply involves frequent transactions and dealings based on fluctuating trends in the market. It is relatively shorter than the long-term transactions involved in investments. The major advantage of trading over investing is greater profit. Assuming long-term investors earn about 10-15% of the returns every year, a trader is likely to earn the same 10-15% per month depending on the preferences and decisions of the trader.
Also, trading is dynamic and very volatile, hence, it is considered a high-risk money-making technique where the market trends directly influence the outcome. So trading can incur both hefty profits and losses for traders.
The basics of trading is to purchase assets when the price is relatively low and sell them off when the price is high. However, there are other different strategies like reverse trading and short-selling, which are majorly used by professional traders to make huge profits over the short term. These strategies are very risky and not advised for beginners.
What are the types of trading?
As a potential trader, you need to understand the broad categories of trading so that you can choose your own style and make use of it.
1. Intraday trading/day trading
Here, traders buy stocks and sell them off on the exact day. However, your trade has to be squared off in one day according to the specified regulations.
2. Delivery trading
This is also called investing. It involves buying assets holding them for their desired period, and selling them off once it is convenient. The significant difference between delivery trading and other kinds of trading is that this one happens without any leverage. Usually, there is no short selling involved, and these positions can go on for decades even.
3. Futures & options trading
This is also called derivatives trading. It simply means a contract whose value primarily depends on the prices of a specific underlying asset. Typically, a trader assumes the prices of these contracts and attempts to gain returns via price movements.
4. Swing trading
In swing trading, a trader will have to take positions on their desired assets typically for just a few weeks. Basically, swing traders mainly use technical analysis to search for different trading opportunities.
5. Scalp trading
Scalp trading involves high leverage where a trader intends to earn a small profit even with the smallest price changes. Here, traders attempt to open and close positions in extremely short periods in different markets such as securities and foreign exchange with the sole aim of earning a small profit from these trades.
What are the major differences between trading and investing?
Below, we’ve highlighted some of the major differences between trading and investing based on different factors:
Risk involved
| Investing | Trading |
| The risk involved in investing is lesser because the cryptos are held for a longer period of time so it rides out different market trends. | The risk involved in trading is very high as the traders make use of leverage that can influence the invested capital even with the smallest movements in the prices of assets. |
| Market volatility over the short term has just a little influence on investments since investors are willing to keep it for long periods. | Trading primarily involves capitalising on slight price movements and it can lead to high losses, especially if the price begins to shift in the opposite direction and the dealer has not taken advantage of a stop-loss order |
Period of investment
| Investing | Trading |
| The duration of investment here is generally long and it is similar to running a marathon. So investors have to be patient to achieve their target | Trading is typically for short-term, and it basically involves capitalising on sporadic price changes |
| Investors may keep their assets for even decades and would likely want to wait out patiently different volatile stages in the market | Traders welcome the high risk of market volatility and are likely to capitalise on different price fluctuations, especially during volatile markets. Traders may also decide to sell a stock in a few hours just wait for weeks as well, if necessary. |
Capital growth
| Investing | Trading |
| Investing simply involves growing your capital gradually by holding it for a long period of time. | Traders intend to make quick profits so it is a short-term technique. |
| Investors gradually grow their capital over time but also receive other benefits such as dividends. | Traders generally grow their capital by consistently searching for suitable opportunities to execute their trades and also develop strategies for a very successful trading journey |
Effort involved
| Investing | Trading |
| Investing generally involves minimal effort on a consistent basis as investors are prepared to hold on to their assets for a long period | Trading requires you to put in a considerable amount of effort because it primarily involves analysing the markets exhaustively before deciding to take a trade |
| Investing requires you to identify the right organizations with a powerful potential to grow and make gains in the future. You also need to have an understanding of the company basics before you start investing. | Trading requires tangible analysis. It is popularly called technical analysis and generally includes looking over the charts and determining patterns in price movements and fluctuations. Also, it includes preparing sound and solid strategies to reduce losses or mistakes. Generally, the risk in trading is very high, hence, a trader needs to be very careful |
Style of analysis
| Investing | Trading |
| Investing primarily involves fundamental analysis | Trading needs technical analysis |
| Fundamental analysis in investing involves checking the organisation’s financials, balance sheets, important ratios, balance sheets, and their potential to grow and yield more gains with time | Trading involves analysing charts, determining patterns obtained from price movements, using indicators to develop buying and selling signals and preserving the daily market belief in check |
Which is more profitable, trading or investing?
There’s no straightforward answer to this question. This is because your profit primarily depends on you and your exact financial situation. However, trading is suitable for people who have a good understanding of the markets and how they operate. Also, traders are far more risk-tolerant than investors. Therefore, they are likely not to get distracted whenever the market dips or if they take a heavy loss. Individuals who are more risk cautious and want to conserve their capital will do better with investing.
Is trading harder than investing?
Trading is typically a more complex process than investing. This is because trading needs constant monitoring of the markets and much better knowledge of how assets and the different markets work. Usually, traders are likely to purchase and sell assets on a regular basis, unlike investors who just buy assets less regularly. Also, unlike many investors, traders have the capacity to keep their feelings at bay. They know how to manage their emotions during big losses. This can be relatively difficult since big losses are generally harder to swallow.
It is not uncommon to see people confuse investing and trading and some may even use the words interchangeably. The reason for this confusion is clear to see, as there are quite a number of similarities between these two terms, such as the need to create accounts and buy and sell assets. However, these two terms are completely different from each other. Investors generally have a longer time horizon than regular traders and are typically more risk-averse. However, traders have a far better understanding of how the market and different assets work.
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