Key Differences between Investing and Trading

Beyond the fact that both investing in the context of the stock exchange and trading have the same objective of wealth creation and making profits, they are inherently different.

Investing in the stock exchange, involves the buying and selling (trading) of stocks. Beyond the fact that both investing in the context of the stock exchange and trading have the same objective of wealth creation and making profits, they are inherently different.

There is a fundamental difference between trading and investing, and much of it has to do with the time involved and the strategies used. A person who trades generally uses analytical tools to increase his or her chances of making a profit in a timely manner.

The person who invests on the other hand wants to see his investments grow over a long period of time and is, as such, concerned with the valuation of his investments in terms of continuous growth. Key differences between the both of them include the following:

Time Spent

A fundamental difference is that investments are usually held for long periods of time that could span years or decades. With investments, very little time is actually spent in the process of buying and selling.

When trading on the other hand, investments are held for incredibly short periods of time. If for some reason, a trader needs to buy and sell a stock in the same day to get an amount of profit, he would not hesitate to do so.

As such, it requires that transactions like buying and selling of stocks are carried out more frequently. While investors hold for what could seem like the ultimate growth in value, traders simply hold stocks until short term profits can be made.

Investment strategy

The major strategy for the investor is to buy and hold. This strategy allows the investor to wait out less profitable positions and have a real growth in value. However, the strategies available to the trader are in their numbers.

The procedure for many of the strategies is centred on scalping which involves profiting from small price changes. For this, traders cannot wait. They not only leave investment positions swiftly, they plan ahead of time what their exit strategies are.

They take advantage of rising and falling markets and also apply strategies like stop-loss orders to cut their losses.

Use of Analysis

Investors are also known to carry out analysis. However, their analysis are based on fundamental market knowledge. The result of their analysis is to heighten the understanding of their investments as opposed to making drastic or impulsive investment decisions with them.

Traders are the exact opposite in this regard. Traders use technical analysis methods to increase their chances or at least predict the probability of making short profits.

Risk

There is no doubt that risk affects both the investor and the trader. However, based on the fundamentals of higher risk and higher rewards, trading is a riskier venture. When investing, short term volatility can be ignored.

Day to day market cycles will not affect the investments. Trading puts you directly where the heat is. The trader is in a frenzy as one wrong event can cost him all of his investments.

Perhaps another fundamental difference is that investors focus on value and traders invest based on trends and forecasts. For sustainable investing, it is best to actually be an investor.

This does not mean trading is bad. You just need to develop the right expertise for it and be ready to take the losses that come as much as the profits.

Written by Lawretta Egba.