The two concepts – trading and investing – are so similar that they may become quite confusing to financially lay people. Both involve seeking profit from the investment of an asset and, quite often, the man on the street may believe they are one and the same. That is when the expert opinion of a savvy investor is of utmost importance.
Expert consultants will breakdown the differences between trading and investing as follows:
INVESTING:
- Investing occurs when someone acquires an asset hoping that its value will appreciate in value over time, so that it can be sold at a higher price than the initial price of purchase. The difference is the profit – hence the investor has increased his money.
- The common assets that investors generally purchase are stocks/shares, bonds, valuable art pieces and real estate – to name but a few.
- The expected time of returns on investments is generally long-term, anything between 5 to 30 years.
- To decide on a suitable investment, the investor analyses the intrinsic value of the asset, i.e., determines whether its current market value is over, fairly, or under-valued. Should the asset’s value be higher than the current market value it can be considered a good investment and the investor will purchase the asset.
TRADING:
- When trading, the investor will be spending money on assets that will hopefully appreciate in value in a short space of time, with profits being subjected to the volatility of the asset.
- Due to the high liquidity of the financial markets, the investor normally looks for securities which are stocks/shares and foreign exchange, also known as forex to name but a few.
- The time frame for profits and returns is short-term, ranging from just a few minutes to a week.
- The trader normally does not know much about the security they are trading with. The decision to purchase is made by doing simple technical or fundamental analyses and taking the results into consideration.
Although quite similar – both are about buying, selling and making a profit – the core difference is the obvious time of waiting for one’s returns and the dept of analysis done by the investor. Like all business transactions, both involve financial risks. Trading is most probably the riskier of the two, due to the speculative nature of the markets, whilst investing has proven to be the best way of building long-term wealth. Ultimately the decision to trade or to invest will be determined by one’s financial goals and risk appetite.
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The writer gave an easily understandable simplified explanation of the differences between trading and investing. Though helpful, the writer’s target was the financial layman and he could have gone further to explain that trading for the general public differs from that of huge financial institutions i.e. the financial powerhouses trade the actual instruments and rarely use leverage, whilst the general population trade CFDs (Contract for Differences) i.e. they do not trade the actual instruments but trade on the price fluctuations of the underlying instruments. The general population also make use of leverage, which though it increases profit potential, it also increases the risk associated with the trading.
Now I understand the difference. Thank you.