The differences between investing and trading

The differences between investing and trading

The differences between investing and trading

The differences between investing and trading

Trading and investing are two different approaches to the market.

Let us explain the differences between traders and investors, at first.

Stock traders are individuals (or entities) engaged in the trading of equity securities, or the transfer of other financial assets.

They work either for themselves or on behalf of someone else.

They may operate as agents, hedgers, arbitrageurs, speculators, or investors.

Stock investors are individuals (or entities) who use their own money to buy equity securities. The goal of the stock investor is to gain returns, which come in the form of income, interest, or appreciation in value also known as capital gains.

DIFFERENCES BETWEEN TRADING AND INVESTING

Investing and trading may often be classified together.

But, they are both different ways of attempting to profit from the financial markets.

The goal of making investments is to progressively increase wealth over a long period of time by using the buying and holding of a portfolio of stocks, mutual funds, bonds and other methods of investment.

Trading involves short-term buying and selling of stock and commodities such as currency pairs and other instruments. The goal is earning profitable returns which outperform a traditional buy and hold investing.

For example, while most investors may be satisfied with a 10% annual return, traders may seek to achieve this per month.

Period of acting

Return on investment and payback period seem to be the two most commonly used financial metrics for making sustainability investment.

Trading is a method of holding stocks for a short period of time. It could be for a week or more often a day! The trader holds stocks until the short term high performance.

On the other hand, investing is an approach that works on buy and holds a principle.Investors invest their money for some years, decades or for the even longer period. Short-term market fluctuations are irrelevant in the long-running investing.

Growth of capital

Traders look at the price movement of stocks in the market. If the price goes higher, traders may sell the stocks.
So we can say, trading is the skill of timing the market but investing is an art.

The real art of creating wealth by compounding interest and dividend over the years by holding quality stocks in the market.

Risk of both fields

Both, trading and investing, include risk on your capital.

But trading involves higher risk and higher potential returns. The price might go high or low in a short while.

Investing takes a while to develop. It involves comparatively lower risk and lower returns in the short run. But might deliver higher returns by putting together interests and dividends if held for a longer period of time.

Daily market cycles do not affect much on quality stock investments for a longer time.

Essentially differences

Trading is a one day match while investing is a championship.  

Similarly, traders are skilled, technical individuals, they learn market trends to hit higher profits in the stipulated time. It is related to the psychology of the market.

Investors, on the other hand, analyze the stocks they want to invest in. Investing also includes learning business fundamentals and commitment to stay invested for a longer term.

It is related to the philosophy that runs the business.

Traders put money in stock for a short-term,  buy and sell fast to hit higher profits in the market. Missing the right time may lead to the loss.

They look at the present performance to hit the higher price and book profits in very short term.

Investors keep themselves away from the trends and invest in value.

They invest for a longer period of time keeping the attention of the stocks they hold. They wait till the stock reaches its potential.

You are the one to decide if your goal trading at a higher price making a smaller profit in a short time. Or holding/investing on and sell at a much higher price, in the long run, is what you aim for.

A key rule of trading is to only do so when you are certain that there is an upcoming future event which is predicted to drive the stock value of an organization or entity higher.

When trading, there are certain strategies which must be put in place.

Traders should take note of the news and use it to make an educated decision which will hopefully enable them to make a profit afterward. This shows the difference between trading as a short-term investment and investing as a long-term method of gaining wealth.

When investing, the goal is to bank profits over the long term.

With dips in value simply providing the opportunity to buy more of the commodity in question. Investing means sitting it out when the commodity rises in value as there will likely be more good news ahead for the company and more profits to be made.

If you are new to the world of investing and trading, it’s important to know which you are going to choose.

The imperative to increase your financial gain is what defines it.

Knowledge of the subject is important.

If you are knowledgeable about the stock market but have little idea about how to trade Forex, for example, you will naturally head over to the stock market for your first investment.

General advice: Don’t get investing and trading confused – it could seriously hurt your portfolio!

Also, “I love it!” or “I hate it!”

Both are emotional comments about almost anything, and they certainly carry over when it comes to investing.

Why we have to discuss about this? For example, 2016 have been interesting when it comes to investing. But 2015 wasn’t so great. 

So, how should you deal with this uncertainty? 

It would be helpful to look at how we emotionally react to the up and down movements of the investment markets. 

We offer the picture below for us to examine.

The differences between investing and trading

The market is never in a straight line, but, as you can see, when it moves up, we are optimistic. We are euphoric. Look at that picture, look at that line where the maximum potential risk level is reached!

What could possibly go wrong when we’re so smart?

But the markets move down, as they all do at some point. And our emotional state changes. We try to justify why we couldn’t possibly be wrong. And as the slip continues, our emotions get stronger and stronger. Also, there is fear to be kicked in more and more. And we’re more concerned about being wrong than the value we might be losing. 

How could we suddenly have gone from being so smart to be so dumb?

Our emotions have become so overwhelming. We convince ourselves that we really don’t know anything. And now it’s time to get out. Or we might think this whole investment process is rigged against us. It couldn’t be our faults. 

So, what can we do?

Our depression needs to decrease, and optimism needs to take over again. So we can decide to invest again.

You need to learn to not let emotions have much of any part of the investing process. 

How can you accomplish this?

You need a plan. A logical plan based on fact, not emotion.

The goal of investing is simple: to grow your assets. Yet investing involves risk, which means you might end up with less than you started. However, without risk, there’s no potential for reward. 

Your comfort level with risk has roots in your personality and life circumstances.

Do you know what is myopic loss aversion?

It is the tendency of investors who are loss-averse to evaluate their portfolios too frequently. 

That, in turn, leads to a focus on the short-term volatility of the market and, as a result, they invest too little in risky assets.

We found something interesting. 

Based on historical evidence for the S&P 500 Index from 1950 through 2014, investors who check their portfolios on a daily basis can expect to see losses 46% of the time and see gains 54% of the time.

However, while they see gains more frequently than losses because the average investor tends to feel the pain of a loss with twice the intensity that joy is felt from an equal-sized gain, the more often investors check the value of their portfolios, the more net pain is felt.

The pain/joy meter for an investor who checks his or her portfolio daily will show an average of

38 ([-46 x 2] + [54 x 1]).

Over the period 1927 through 2015, investors who resisted the urge to check their portfolios daily and moved to a monthly check experienced losses only 38% of the time. That reduced the net pain reading from

38 to -14 ([-38 x 2] + [62 x 1]).

Over that same period—1927 through 2015—losses have occurred only 32% of the time on a quarterly basis. Investors who reviewed their portfolio values quarterly (like many who participate in 401(k) plans and receive quarterly statements) experienced a shift from net pain to a net joy reading of

+4 ([-32 x 2] + [68 x 1]).

Finally, investors whose patience and discipline allowed them to check their values only on an annual, calendar-year basis experienced losses over that period just 27% of the time. That results in a large improvement in the net reading, from

+4 to +19 ([-27 x 2] + [73 x 1]).

As you can see, the frequency of losses continues to diminish over longer time intervals. The pain/joy reading improves accordingly and makes for a happy (and more successful) investor.

So, if you are a masochist, you should be checking the value of your portfolio as frequently as humanly possible. For the rest of us, the implications are striking.

First, the more frequently you check your portfolio, the less happy you are likely to be. And thus less able to enjoy your life.

Second, the less frequently you check the value of your portfolio, the more equity risk you should be able to take.

Third, the more frequently you check your portfolio, the more cause you will be to abandon your investment plan in order to avoid the pain of seeing losses.

If you cannot resist frequently checking your portfolio’s value, consider investing more conservatively. To avoid the pain of losses which can hurt your portfolio. 

The less you pay attention to the financial media and economic or market forecasts, the more successful an investor you are likely to be.

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