What’s the Difference Between Trading and Investing?

The financial community’s cornerstone is investing and trading, yet a startling amount of people don’t know the difference. Let’s look at it more closely.

Summary
Did you realize there’s a distinction to be made between investing and trading? If that’s the case, can you explain what the difference is? Of course, if you’ve worked in the financial markets before, your replies will be “Yes” and “Yes.” Newcomers to finance, on the other hand, frequently mix these responsibilities together. In reality, they are fundamentally opposed in certain aspects.

Investing and trading are the cornerstone of the financial world, so it’s critical to understand the differences, whether you’re hoping to break into the profession or just trying to figure out what your company’s retirement plan entails.

The TLDR on Investing vs. Trading

To begin with, both investors and traders are looking to make a profit. Their ultimate aim is the same, but their methods for getting there are vastly different. Investors typically purchase securities with the intention of holding them for a long time, anticipating that their value will increase over time.

Traders, on the other hand, want to take advantage of rising and falling markets to buy and sell more frequently than investors, resulting in smaller but more frequent profits.

101 on Leaving a Legacy

Warren Buffett, the legendary investor, wants investors to understand that when they buy a company, they are purchasing a piece of a tangible firm as well as the potential earnings it may make in the future. A savvy investor would be less motivated to sell their shares in a fantastic company that had a difficult year or quarter since they are in it for the long haul.

Buffet is a great role model for long-term investing: Berkshire Hathaway (Buffet’s company) increased its interest in two of its flagship holdings, American Express and Coca-Cola, by more than $13 billion and $17 billion, respectively, between 1996 and 2014. How? Nothing – that is, nothing other than buying and holding these stocks for decades.

Buffett has not purchased or sold any shares of American Express or Coca-Cola as of today. There’s no reason to be concerned because these companies’ primary businesses and ability to generate large profits haven’t changed – their foundations are still sound.

Tools of the Trade in Investing

Fundamental research is one of the many tools available to investors. This study depends on qualitative analysis, in which experienced analysts examine a company’s overall health. They look at a company’s management, corporate goals, and plans, attend meetings, and analyze quarterly and annual financials extensively (forms 10-Q and 10-K, respectively). Quantitative measures like as a company’s market capitalization, price-to-earnings (P/E) ratio, dividend payout ratio, dividend yield, return on equity (ROE), and many other predicted and historical variables are also used in fundamental analysis.

Traders, on the other hand, frequently employ technical analysis, which employs its own set of measurements to attempt to predict price moves by studying previous data.

A Look at Asset Classes Other Than Stocks and Bonds

Investing isn’t only about stocks, of course. Equities (stocks), fixed income (bonds), and cash equivalents, or money market instruments, have traditionally been the three basic classifications of investable assets. Real estate, commodities, futures, various financial derivatives, and crypto investments are just a few of the asset types available today. There are numerous investment products available within these asset classes.

Vehicles and Instruments as Investment Products

Investment products include all stocks, bonds, options, derivatives, commodities, and other financial instruments that you can purchase as an investor. These products can be further classified based on their structure. For example, if you buy stocks, are they in the form of mutual funds, index funds, or individual company shares? If you have a 401(k) plan through your employer, you are already investing — just not in individual company shares, but in baskets of shares, such as exchange-traded funds (ETFs).

Different products are available for institutional and individual investors, and they can be tailored to reflect different investing styles, risk tolerances, goals, and time horizons. Investors buy investment vehicles for their ability to grow capital and pay out dividends over time, regardless of their product mix.

Legacy Investing 101

Trading is typically a faster, more action-oriented process than the buy-and-hold research-heavy approach to investing. It’s not that traders don’t do any research or due diligence on the products and companies they trade — in fact, they usually rely on fundamental analysts for that — it’s just that their skill sets and toolboxes are different. Traders are valued on the trading floor for their speed and quick thinking. They are constantly juggling multiple potential strategies and techniques, either alone or in combination, in order to maximize profit for their clients.

Trading, in general, is far more technical and quantitative than investing. Some traders almost exclusively use graphs, charts, ratios, averages, and other mathematical indicators to determine which assets to buy, sell, or hold. Furthermore, the trading world has a plethora of order types with names like “all or none” and “fill or kill.”

Another factor that distinguishes traders is their trading styles, which may broadly reflect one of the following categories:

Position trader: Maintains positions for months or years.

Swing trader: Holds positions for several days or weeks.

Day trader: Only holds positions during the day; no overnight positions.

Scalp trader: Positions are held for seconds to minutes; no overnight positions are held.

Trading frequently entails opportunistically purchasing an asset only to sell it immediately if you are a scalp trader, or a few days later if you are a swing trader. Trading, due to its quick in-and-out nature, can be riskier than investing. For example, suppose you have a hunch that Tesla will release a new and more efficient battery to power its electric vehicles. Taking this hunch, you buy Tesla stock, betting that if they do announce a new battery, the stock will rise.

Related: Cryptocurrency: Understanding Cryptocurrencies

If the trade goes your way, Tesla shares will rise, and you will be able to lock in a profit by selling them quickly. However, if the news fails to impress the market, you may suffer significant losses. Another distinction between trading and investing is that the gains on short-term investments are generally more taxed than those on long-term investments.

Investing and Trading in Cryptocurrency

The term “legacy” refers to the traditional disciplines of investing and trading that existed prior to the existence of cryptocurrency. Investing and trading in cryptocurrencies differs from traditional methods in several ways, including the following:

  • You don’t own a piece of a firm as you do with stock when you invest in crypto. Security token offers (STOs), which might possibly award the owner an equity portion in a corporation, are the only exceptions to this rule.
  • Buying and selling traditional stocks takes significantly longer and is far more complicated than buying and selling bitcoin. You can, for example, transfer digital assets from an exchange to your private wallet in under 10 minutes.

Crypto asset trading is not as strictly regulated as securities in the United States and most developed countries. Nonetheless, there are a handful of crypto trading sites that are well-regulated.

Related: How Do I Invest in Bitcoin and Trade It?

  • Several crypto investment and crypto trading strategies (selling short) are available, as well as some order types (stop-loss) and investment products (options). However, only the most fundamental ideas of traditional investment and trading are currently applicable to crypto:
  • Cryptocurrency investment is still mostly for the long term. You buy digital assets and hold them for a long time, which in crypto-time may be one to three years, in the hopes that their value would increase.

To make a profit, crypto trading tactics emphasize speedier turnaround times. While days, weeks, and quarters are still possible, it’s more common for it to be minutes or even seconds.

However, the conceptual parallels end here. Finally, when and where possible, crypto trading tactics borrow from traditional disciplines. But, for the most part, Bitcoin is a brand-new asset with a brand-new infrastructure and some novel investment strategies.

Related: 8 Profitable Investment Ideas And Opportunities In Africa

 

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