Investing and trading are two very different methods of attempting to profit in the financial markets.
The Long-term Investing Strategy
The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of the stocks, mutual funds, bonds and other investment instruments.
Investors often enhance their profits through compounding or reinvesting any profits and dividends into additional shares of stock. Investments are often held for a period of years, or even decades, taking advantage of perks like interest, dividends and stock splits along the way.
While markets inevitably fluctuate, investors will “ride out” the downtrends with the expectation that prices will rebind and any losses will eventually be recovered. Investors are typically more concerned with market fundamentals, such as price/earnings ratios and management forecasts.
The Trading Strategy
Trading, on the other hand, involves the more frequent buying and selling of stock or currency pairs, with the goal of generating returns that outperform buy&hold investing.
While investors may be content with a 10–15% annual return, traders might seek a 10% return each month. Trading profits are generated by buying at a lower price and selling at a higher price within a relatively short period of time. Where buy&hold investors wait out less profitable positions, traders must make profits (or take losses) within a specified period of time, and often use a protective stop-loss order to automatically close out losing positions on a particular price level.
Trading stocks is much more time consuming and frantic compared to making investments. In the case of investments, once you have made sound investments you can simply relax without buying or selling for months/years.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” — Paul Samuelson
Pros & Cons
- Making long-term investments requires knowledge of companies’ financial essentials — like Financial Ratios, understanding Free Cash Flows, DCF valuations, Relative valuation multiples like PE Ratio, PBV Ratio.
- Although you have the opportunity to make piles money quickly with trading the risk involved is much higher in trading than in investments. You could lose more money than you actually have in trading. There is a risk of losing money in investments as well, but that could occur because of the vagaries in the business and due to market timing.
- The cost involved in trading is usually high as every time you trade a stock you will have to shell out certain fees. Hence, your returns need to comparatively higher to cover up those costs. In contrast, you will lower costs since there is less of the buying and selling but then the returns will also be comparatively lower.
- Long-term investments are for those people who want to make money but avoid huge losses. You could earn a decent return by reinvesting your dividends and leaving your money In the market for the long term.
What Should You Choose?
When deciding between trading vs investing you need to think about the time you can devote for any of them. If you can spend hours on reading charts and graphs on a daily basis then trading would be the thing for you. If not then you would be better off with long-term investments.
Considering the size of an investor and their goals, if you are a small investor you would be better suited for long-term investments with the goal of growing your portfolio whereas if you are a large investor with the goal of short-term trading then you should plan to beat the market.
Traders often choose their trading style based on factors including account size, amount of time that can be dedicated to trading, level of trading experience, personality and risk tolerance.
Both investors and traders seek profits through market participation. In general, investors seek larger returns over an extended period through buying and holding.
Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter timeframe, taking smaller, more frequent profits.
Why are they important?
Investing and trading are dependent from each other, so without the existence of traders, investors would have no liquidity to buy and sell stock and without investors, traders would have no origin from which to buy and sell. Hence, it is difficult to decide which one is superior.
If everyone was an investor, then no one would be willing to sell or buy in the short-term, leading to an unhealthy market scenario. In the end, it is liquidity that tends to smooth out market prices.
In the end, you decide which is better for you by the trial and error method, investing or trading on various stock and value platforms, since it only depends on your personality, financial situation and lifestyle.