Investing vs. Trading: Which Is More Profitable?
Should you trade or invest for the sake of profitability? This topic seems to be so basic yet so important to grow your account. As each type entails different features that fit into different goals and personality. How to know which one is more suitable for you? Scroll down the article for details!
Investing: Definition and Goal
Investing comes along with long-term holding. Investors can hold stocks, mutual funds, etc. They aim at earning profits to build wealth over a period of holding which can be one year or even decades.
Profits can come from the differences of interest, dividends, and stock splits along the way. Instead of instantly reacting to short-term downtrends like traders, investors will patiently wait for the prices’ rebound to cover any potential losses in tough situations.
What holds the attention and curiosity of investors is the market fundamentals such as price-to-earnings ratios and management forecasts, rather than updated market movements. In other words, they care more about the long-term value generation instead of small profits by the differences of interests by day-by-day changes in market trends.
If any investor does not keep track of the holdings’ performance on a regular basis, they might probably follow long-term values which can only be seen after decades. Daily fluctuations of price actions do not bother them so much!
The priority of investors is to explore intrinsic values which can get through tough times and rebound with higher profitability. It explains why they concentrate on getting insights into fundamental analysis.
Trading: Definition and Goal
Trading relates to more frequent transactions. For instance, buying and selling stocks, commodities, currency pairs, etc. can take place within a day and almost everyday. So, a popular goal of traders is to gain returns from the differences in prices of their holdings.
Annual returns of 10% to 15% can satisfy investors while traders look for 10% return every month. Instant profitability is what traders care the most so they will look for the right timing of buying at a lower price and selling at a higher price.
Because the whole process of buying and selling takes place in a short period of time, people call it short selling. Traders often apply a protective stop-loss order to automatically close out failing positions at the preset price level.
As for short-term returns, traders pay more attention to technical analysis and related tools such as moving averages and stochastic oscillators than fundamental analysis.
We can divide traders into many groups based on the instruments they choose to trade, such as stock traders, commodity traders, crypto traders, etc.
Besides, we can take the time frame or holding period as a standard to categorize trading style, including
- Position trading ranges from months to years.
- Swing trading lasts from days to weeks.
- Day trading relates to trading within the day only with no overnight positions.
- Scalp trading involves trades in seconds to minutes with no overnight positions.
There are many elements that join in the process of making decisions about choosing a trading style. They can be account size, amount of time, trading experience, risk tolerance, and personality.
Trading and Investing: The Basic Differences
There are many factors that you can hold on to differentiate trading from investing. The points we mention below are crucial for you to decide whether you should trade or invest.
- Long-term holding vs. short-term holding: Investments can last for years or decades so an investor can win back from their initial bet. Meanwhile, trades can come back with profits (or losses) within a day.
- Risks investors undertake can be bigger than the ones traders do. Investors can deal with greater risks due to long-term holdings while traders can win back from losses by instant trades.
- Traders might suffer from higher stress than investors. Financial markets are full of thrilling moments when price actions are volatile. Thus, traders have to deal with the ups and downs of their moods almost everyday. Meanwhile, if investors have idle money for long-term investors, they will not be bothered by tumultuous market trends.
- Many small profits vs. One big profit: Traders can enjoy small profits due to the differences in buying and selling prices while investors will celebrate their returns that can be millions of dollars after years.
Is Trading More Profitable Than Investing?
Well, we have to admit that it is a tough question to answer. The profitability of either trading or investing depends on many factors. Strategies, techniques, and experiences are the main points.
Watching Warren Buffet invest and win back billions of dollars can be both intriguing and inspiring. He can hold millions of dollars for one stock in decades and gain higher returns. Is it a sheer fluke? It can be a part of the game.
Yet, it is not a whole story. The deep-dive into a company’s status quo, the fundamentals, and long-term forecast skills bring about the consistent profitability in Warren’s investing career.
Investing is a tough game of calm minds and rich men. Why? For example, if you invest $1000 in a stock while you have enough money to live and maintain the cost of living, it will be a nice try. However, if $1000 is all you have, investing is not a right choice!
Traders do not have to wait for years to gain profits from their bets. They can see their accounts get bigger everyday through trading. Instant returns are the main fascinating point as it generates instant gratification. It is more suitable for those who do not have much idle money.
Another factor for consideration is your personality. If you are into energetic vibes of ups and downs in price actions, trading is a perfect match. On the other hand, if you do not want to spend so much time monitoring the screens and have idle money, investing should be your choice.
Trading can be more profitable than investing, and vice versa. Your skills and experiences can decide the ending results. The thing that you should take care of more include risk tolerance — how much losses you can suffer.
Joining the financial markets, whether you choose to be a trader or an investor, relates to risks which means that you should be ready for losses!
So, What is the Point Here?
If you are confused between trading and investing, this blog hopefully will help you disentangle the mess in your mind. Picking up the right approach to your money can make your account grow through time. Understanding the basics and main features of trading and investing can ease your decision-making process.
