Trading vs. Investing – key differences

People tend to confuse trading with investing. In this article, we will explain the main differences between the two.

Both trading and investing involve putting money in a financial market, hoping to see income pouring in. But do you know to distinguish one from the other?

Don’t worry, we’re here to help. Let's take a more in-depth look into these two popular ways of making money. Since time’s precious, we’ll keep this short & to the point.

Getting things straight

Firstly, we need to clarify these two terms. #Investing is about buying the asset you’re interested in, while #trading implies taking a speculative position on its price. For example, when you invest in a stock, you physically buy a portion of its shares. If you trade that stock, you anticipate if it will fall or rise and open a position according to your strategies.

Major differences between the two concepts derive from this basic differentiation.

Investing is for the marathon runner

Investors buy assets such as shares of $GOOGLE or $AMAZON, hoping prices will jump, and they will reap the reward when they sell it for more in the future. So, instead of putting your hard-earned cash in a bank safe (or account, as we live in the 21st century), you can invest in stocks or ETFs.

However, we’re not talking about the same risk level. Banks offer interests, no matter what. If you invest in the markets, you expose yourself to those markets' risks. But since you hold your position in the long term, short term market fluctuations might not matter that much, as they have enough time to rebound. Anyway, remember that if the share price falls below the amount you paid and sell your shares at this lower price, you will end up with a loss in your budget.

Trading, more fitting for the sprinter?

Trading works differently than investing. Traders concentrate on making more frequent trades over a shorter period, taking advantage of price swings. But this does not mean they cannot trade in the long term. On the contrary, they can opt from many different trading styles. Read more about types of traders to enrich your knowledge and see what catches your eye!

Derivative trading solutions such as CFDs offer an additional advantage over investing: you can trade both long and short. That means you have the opportunity of making money from rising or falling markets, as long as you anticipate where prices will go. And you just trade on the price movements of your chosen assets. You don’t own the assets in question.

At CAPEX.com, you can trade more than 2.100 financial instruments, including CFDs on popular indices, shares, currency pairs, and commodities. Check out our offer!

Exchanges for investors, brokerage companies for traders

Generally, investing in a market such as the stock market works through exchanges (although some brokers offer this option). You may have heard of the New York Stock Exchange or the Hong Kong Stock Exchange. Companies list shares of their stock on an exchange through an initial public offering (IPO). Investors buy those shares, which allow companies to raise money to grow their businesses.

Over time, you can enjoy some benefits like dividends - regular payments to you, as a shareholder, from the company's profit. If the company fails to post good results, then you might not get dividends.

And now, the downside: investing in exchanges requires you to pay specific fees depending on the country where the company is listed. Tax laws are subject to change and depend on individual circumstances or whether you invest in exchanges or intermediary companies. Commissions also apply, should you be tempted to invest via intermediaries.

On the other hand, traders only use brokerage companies to get into the markets. Brokers offer trading platforms, where all the trading activity takes place. It's crucial to pick a secure broker, which provides a safe trading environment and trading conditions if you contemplate trading.

Here at CAPEX.com, you get to trade with a fully regulated European broker while gaining access to one of the world’s most popular platforms, MetaTrader5 and the exquisite CAPEX WebTrader platform! Furthermore, you don't have to worry about commissions for deposits and withdrawals.

Where do you stand?

Now that you know more about trading and investing, you can decide for yourself: are you a long-term investor, or would you instead become a trader and focus on the shorter-term?