Trading Vs Investing Differences and Similarities

Trading explained

The market for online trading has grown immensely in the last decade. The internet has facilitated huge growth within the industry as more and more trading platforms have emerged. But, what is trading? How does one differentiate between trading vs investing? At CAPEX, we aim to provide you with comprehensive coverage of all relevant terminology.

You’ll find that trading refers to an activity where the frequency of buying and selling is a lot higher. Transactions take place on a continuous basis and include buying and selling of securities. The idea behind trading is to generate consistent returns that preferably outperform that of more long-term investments. Thus, individuals who engage in trading aim to realise positive returns over a shorter period of time.

Investing explained

When we consider that trading may well take place over a shorter period of time in terms of potential return, investing aims at accumulating wealth in the long term. Investors are less concerned about quick returns and aim to buy and hold securities for an extended period of time. Investing focuses on long term growth by taking advantage of interest rates, dividends, and such throughout the process.

Both aim at realising returns in financial markets

When it comes to assessing the key similarities of trading vs investing, the main factor is that both activities are focused within financial markets. Moreover, both trading vs investing aim to realise returns within these markets. However, it is the approach which tends to differ significantly. You’ll come to find that the stock market is a haven to various individuals – none more so than both traders and investors.

It’s important to use a plan or strategy

It doesn’t matter whether you are looking to trade or invest, a plan of action or strategic approach is necessary. Without this, you’ll come up empty for the most part. Traders require short term strategies that assess stock indicators while investors utilise long term plans which assess the viability of the companies whose stocks are being bought. Either way, having a thought-out approach is a key similarity in both trading vs investing.

Time periods tend to differ

You’ll come to find that with trading vs investing the time period will differ across the board. When it comes to trading, individuals engage in trading in the short term. This isn’t to say that they only do it for a small amount of time. However, the short term returns are the order of business. On the other hand, investing requires a far more long-term approach. This requires patience and commitment to holding investments for years on end as opposed to one day or one week.

Trading may well prove riskier

When it comes to trading vs investing, one may prove to be more risky than the other. Both activities mean that you will have to risk your capital with no sure sign that you will get all, or more, of your money back. However, investing takes a more balanced approach. This means that the overall risk may be lower but so will short term returns. In the long run, it’s still possible to realise a decent return. Trading takes place over the short term and can involve trading more volatile stocks which are riskier. The fact that price fluctuations are more erratic, the possibility of higher returns in the short term are prevalent. The higher the risk, the higher the reward as the saying goes. It’s important to factor in associated risk when trading and investing but especially the former.

Different skills and know-how

Traders and investors both utilise  their knowledge and understanding of markets when partaking in their given approach. However, day trading vs investing requires different skill sets. One way to look at it is that traders analyse the psychological side of financial markets. They aim to apply technical skills and insights so as to capitalise on market movements as quickly and swiftly as possible. On the other end of the spectrum, investors are more concerned about the philosophical approach that the underlying companies have adopted so as to assess which stocks and instruments will yield consistent returns over a longer period of time.

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