Trading vs Investing – What’s the difference?
If you are just starting and considering if you should invest or trade, you might be a bit confused about the difference.
Should we try to try to clear up the difference?
If you have heard from your friends or family that they are investing or trading, what does it mean?
There are 2 basic difference between investing and trading - the duration of holding and the decision making process.
Duration of holding
The most obvious difference between investing and trading is the time duration that one holds onto the assets they have purchased. While it can be hard to give you a timeline, but let’s try to quantify it.
Trading – Few seconds to a few weeks.
Investing – years to decades.
From the above, it becomes clear that investing and trading have very different time horizons. So, to explain this clearly, trading is the buying and selling of an instrument (stocks, commodities, etc) for a quick or short-term profit.
On the other hand, investing is more of buying an instrument (usually stocks or gold) in the pursuit of achieving long-term gains. Investors usually perform their own due diligence on the company, by studying its management team, financials and other fundamentals.
How are decisions made?
Apart from time, one major difference between a trader and investor is how each make a decision to buy or sell.
Investors usually perform their own due diligence on the company. They do this by studying a company’s fundamentals, this includes looking at its income statement, balance sheet, cash flow statement, growth over the years in both revenue and profit, and its potential for growth in the future. Based on the above data, investors can check the company’s financial metrics to determine if it is under or overpriced and decide if they want to buy the stock. They also study the management team to make sure they are competent and can continue grow the company.
Trading decisions are made based on price action, or momentum (ie. get in when everyone is buying or selling and then get out). To do this, traders use technical analysis to determine if they should buy or sell. This includes studying chart patterns, candlestick patterns, or any other technical indicators that they have determined which give them an edge.
Wrapping it up
So, to wrap it up, the major difference between investing and trading is the time horizon of the individual and the method of deciding the purchase. While both trading and investing can make money for an individual, it boils down to the amount of time and mental stress that an individual wants to take in this pursuit. Investing is a more hands-off approach (we will discuss this in a later article) while trading requires an individual to be in front of the computer to execute the trades daily. So which do you want to be - a trader or an investor?
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Disclaimer: All opinions shared in this article are the opinions of the authors and do not constitute financial advice or recommendations to buy or sell. Please consult a financial advisor before you make any financial decisions.