Investing or trading? Is one better than the other? Well, it depends on who you ask. It goes without saying that if you ask an investor, they will tell you that investing is better, but for traders, it goes the other way around.
It all comes down to your own preferences and what the best move for you is. Both have their pros and cons. But let’s start from the basics. We will cover both strategies by using the stock market example.
One thing that investing and trading have in common is that they both are conducted in a financial market. In our example, this is the stock market. There are 11 stock market sectors, that are further split into 24 industry groups, 69 industries, and 158 sub-industries in which major companies are categorized.
The primary 11 sectors are real estate, consumer staples, consumer discretionary, utilities, energy, industrialists, consumer services, financial, and technology. On the stock market, shares are traded and this is the primary market. Companies offer shares in order to raise the value of their company.
This market is public and was created in 1999 by MSCI and Standard & Spoors. Since then, it was a fun pastime for a lot of people, but with the coronavirus pandemic, its popularity has reached new heights. So much so that big investors and traders have become celebrities.
Trading and investing are two different apprentices to this market. Now that we have established the basics, let’s see what investing and trading have to offer for you.
By investing, you are putting your money into the assets of one company that you think will appreciate in value over time. Investing is a passive type of income as it does not require any further action once you invest your money. All you can do after that is wait and see if your predictions were right. Usually, people who opt for this type of income are not looking for quick results. They play the long game and are looking to gain wealth through their patience, which can sometimes take years or decades.
These investors, often called Ancestors are more concerned with market fundamentals, like price-to-earnings ratios. This is usually a way to gradually grow your portfolio, so time frames are not really important. Day-to-day changes in prices are not something that Ancestors are really concerning themselves with.
In regard to this, diversification is also really important. This means that owning different types of stock across all of the 11 sectors is crucial in the waiting game.
This is a way to reduce the risk because if one of the investments fails, another will succeed. Both of the aforementioned key points are vital, so consider your risk deliverance and the time period you have when choosing which companies and markets you want to invest your money in.
When looking for stocks to buy in, investigate the history of the company and its earnings, so you can determine their potential trajectory.
Contrary to investing, trading is all about making money quickly. While they are also buying stocks and assets of the company, traders’ time frames are weeks, days, and sometimes even minutes.
There are two most common forms of trading: swing trading and day trading. Swing traders usually buy assets they think will rise in value in a couple of weeks, so their time frame is a bit longer, as they do keep their stocks for an extended period of time.
Day traders on the other hand, never keep their assets overnight. They sell and buy stocks, all on the same day. In the world of trading, stocks fundamentals do not matter.
While investors look for the stocks that will rise in value over time, for traders that are of little importance. Why? Because if a stock will do good in a couple of years, it doesn’t mean that will rise within the next couple of minutes, days, or weeks, which is the trader’s endgame. To make informed trading decisions, they rely more on the analysis of the market and news reports.
Therefore, trading can be quite a risk. You can lose a big amount of money in a matter of minutes, and traders often do it with the money that they don’t yet have. This is called using leverage and is the essential risk of trading.
Big shot traders usually possess greater knowledge than the smaller ones when it comes to market fluctuations. They may be better at reading charts and predicting the outcome, but it doesn’t necessarily have to be the case. Being a big trader can also mean losing a big amount of money — they make mistakes just like everyone else.
Traders usually decide their style of trading by the amount of money they have, the time they want to put into trading, the level of their experience in this field, personality, and risk tolerance.
Although both trading and investing include stocks, they are two completely different activities, with different objectives and goals, making it hard to compare the two.
Trading comes with a higher risk and is usually much more stressful, but it offers the possibility of a very high reward. Contrary to this, investing is more stable and slow-paced. Although the money you can earn is appealing, it does require a lot of work and luck.
At the end of the day, it comes to what is the best option for you? If you have a small risk tolerance, investing is the way to go. On the other hand, if you are looking to earn money quickly and enjoy the thrill, then trading is for you.
Keep in mind, that trading and investing don’t have to exclude one another. As an example, you can always invest 70-80% of your money and try your luck in trading with the remainder of your portfolio. It all comes down to what your preferences are, as well as your situation, abilities, personality, etc.
Whatever you decide, it is imperative that you do thorough research before starting and always risk the money you are prepared to lose.
Now that we’ve covered the basics of how both strategies work, you can use this information and apply it to other financial markets as well, such as cryptocurrency, where you can find an exchange with a good trader and investor benefits for a greater chance at success.
Post By-Isidora Ilin