Trading and investing are often used interchangeably, but that’s a mistake.
The important difference between these profit-making actions, is the timeline.
It’s not just newbies who confuse these terms – it’s experienced market participants too.
Considering the active timeline of a profit-making activity, it can range from seconds to years.
The shorter the timeframe, the riskier the proposition.
The hard and fast rules about investing vs trading make it much easier to distinguish between them.
Investing: what’s it all about?
With investing, you are investing funds in an asset or group of assets to realise a profit over the long term.
The specific timeframe is long enough that the investor is not concerned with short-term price fluctuations.
As an investor, you can actively or passively manage your investment. The active option involves:
- Monitoring funds allocations in investments.
- Portfolio diversification (shifting funds around to maximise yield).
Or you can opt for a passive management function by entrusting all activities to a fund manager.
It’s not that investors are unconcerned with day-to-day market activities; they simply see the big picture and focus on it.
You may be wondering whether investments are the safer option; the answer is: it depends. Investing in a failed proposition is a surefire recipe for disaster.
Careful research, systematic planning, analysis and insights are necessary to make sound investments.
Even so, there are no guarantees that any investment will pay dividends over time.
Companies fail, markets crash, complements and substitutes of products and services exist, new technologies are born, and macroeconomic plans and conditions are changeable.
Trading: what’s it all about?
Trading is worlds apart from investing, yet it’s uncanny how similar they are in many ways.
The basic premise of trading is, for all intents and purposes, similar to that of investing.
You take funds and buy assets with the intent of realising a return.
Sounds like investing, doesn’t it? However, the differences are many, and they are notable.
With trading, you focus on micro-elements such as the nuances, intricacies, and minutia associated with an individual company, commodity, index, currency, or cryptocurrency.
An imminent press release could drive up interest in a particular share, allowing traders to buy in before the release and sell to realise the gains.
Trading requires attention to detail, focus, and quick execution. While the timing of an investment is important, it’s not nearly as significant as trading activity.
If you can buy the underlying assets at the right price and sell at the right price and time, you can gain from the trade.
Often, traders buy huge quantities of assets, knowing that slight price movements can generate outsized gains because of volume.
The shorter your timeframe, the riskier the proposition. That’s why traders need to know exactly what they’re doing.
This risk element is compounded when leverage is added to the equation.
Not to be dismissed, leverage is a multiplier that boosts your trading potential to allow volume trading.
When an asset is traded in lots, you purchase a chunk of forex, stocks or commodities, et cetera, with a fraction of the total trade amount down.
The broker provides the rest – the trading platform you’re working on. These multipliers boost the potential yield but can just as easily result in significant losses.
