The goal for trading and investing is more likely the same — make money with capital from the financial market. Although the goal is likely the same, these two ways are entirely different in the return type, duration, etc. Both investors and traders seek to make money by participating in the financial market but differently.
Investors and traders make money by putting capital in the financial market, but they achieve the goal differently. Someone inexperienced in the financial market may take these two as the same, but in reality, the two are far different from each other, a completely different approach.
After completing this article, you will understand the difference between making money from the financial market through trading and investing. Then you can easily choose which method is suitable for you and which type of participant you want to be in the financial market.
What is investing
In the world of the financial market, investing involves putting capital into any financial asset, such as stocks, bonds, mutual funds, etc., for a more extended period as participants expect to rise in value. This type of approach includes making wealth by taking a stake in any asset and hold it for a longer time.
But how long should it hold to consider as an investment?
Here, the period we are talking about is for years or even decades. For example, the retirement fund is a common and popular investment. Investors consider the outlook for an extended period and expect a considerable amount of return from their investment.
This type of approach doesn’t involve transactions regularly. There is no term such as managing trade or investing. It consists of taking stakes at any asset and holding it through ups and downs for a certain period until the goal or expectation is meets.
Investment in a retirement fund allows them to check the account information or make contributions, while they can’t manage their capital more often.
In the above image, we can see how Bitcoin price showed a fantastic return in five years.
You can also invest in a personal investment account, self-directed trading, or managing a portfolio to grow your wealth gradually. So you can buy a house or go on a family vacation.
However, investing involves experience, knowledge, and patience. Risk consists of investing as you can’t make a good profit over a more extended period.
What is trading
Trading at the financial market involves managing trading capitals, frequent transactions, and making money by beating the market. Simply traders observe the market technically, fundamentally making potentially profitable trading positions and holding it for a short period.
The return expectation at trading is always more than investing, and the period is more straightforward. Traders take stakes on specific trading assets such as stocks, bonds, currencies, commodities, etc., and hold them until a particular price movement occurs at the assets.
The aim is different for traders than investors. For instance, traders might expect a return of 5% monthly; meanwhile, an investor may have a 7% annual return from their investment.
The above image represents the EUR/USD intraday chart where traders can make money from buying and selling on a single day.
Trading in the financial market requires skills to be a consistently profitable trader. It also involves risk at trading, but manageable as it allows managing the fund frequently. We define traders at four different types of participation or trading duration: position traders, swing traders, day traders, and scalpers.
Five differences between trading and investing
This part will differentiate trading and investing based on the top five factors, such as participant’s actions, technical and fundamental effectiveness, etc.
- Trading is more profitable than investment
Traders observe the price movement of any asset to make money by participating in the market. It involves frequent transactions on the trading capital and managing it profitably.
On the other hand
Investing is the art of making money by compounding dividends and interest over the years by holding quality stocks in the financial market. Profit target is different for an investor and trader. An investor may expect an 8% annual return of their investment, while a trader may have a 5% monthly return target.
- Investment requires deep knowledge
Investment requires deep knowledge. Let’s make it simpler; if we compare trading with a one-day cricket match, you have to define investing as a test match. In a one-day match, players make boundaries six or four often, when the real art of cricket is in the test match.
On the other hand
Similarly, investing involves long-term goals, so deep knowledge and clear concepts about the investment asset. While trading requires technical, fundamental knowledge and trading skills of managing capital profitably.
- Effect of technical analysis
In comparison to the effect of technical analysis, trading is on an advance. Simply traders observe the price movement of target assets by using many technical terms, tools, and indicators to get profitable trading positions.
On the other hand
Investing involves deep knowledge about assets. Investors can check, follow, or make contributions on their capital; it doesn’t allow them to make any change, transaction, or managing capital frequently. So they don’t need to do technical analysis more often than traders do.
- Effect of fundamental analysis
Both of them, traders and investors, may follow the fundamental news in the financial market. In this case, investors often keep patience during uncertainty and observe till it meets their goals.
On the other hand
Traders face more impact at the fundamental events related to the trading assets. They often seek opportunities and may profitably manage their capital by focusing on related primary data.
- Trading is risky
There is no doubt that both investing and trading involve risks. Trading involves more trouble than the investment besides more return expectations. The price may go up or down in a short period and make the traders lose their money.
On the other hand
Investing involves lower risk than trading as it takes a while to develop investment.
Final thoughts
Finally, you know the fundamental difference between trading and investing. You may now choose and understand which type of making money suits you.
If you decide to be a trader, we suggest doing more practice and mastering the skills of being a profitable trader. Meanwhile, you should research and achieve more profound knowledge about the trading assets and investment type if you choose to be an investor.