Understanding the different terms used in the financial markets is key to developing the skills needed to achieve your financial goals. Something that should be clarified right from the start is the difference between investing vs trading.
Discover what investing and trading are, as well as some of the crucial differences between the two, to help you decide which might be the better fit for you.
The terms “investing” and “trading” are often used interchangeably. Both involve opening an
account with a broker, and buying and selling financial assets, such as stocks, ETFs,
commodities, indices or cryptoassets.
Investing vs Trading: A Comprehensive Guide to Making Informed Decisions
Investing involves buying assets with the aim of making a long-term financial return. The length of this process will depend on your individual circumstances . Some people invest to achieve financial independence and retire early, whereas others invest to fund education or celebrations, such as weddings. Regardless of the aim, investing usually involves following a strategy with an investment time horizon of at least a year.
Investors will usually choose assets that they expect to increase in value by the time they are ready to convert their investment back into cash. There are no definitive rules about which assets should go into an investment portfolio, and diversifying your portfolio across different asset classes is an option that many experienced investors choose.
The assets themselves are not the factor that distinguishes investing from trading. Instead, the major difference is the length of time for which you hold them
Tip: Active investors use tools, such as fundamental analysis , to establish the intrinsic value of an asset to try and make market-beating returns. Passive investors are more likely to buy assets, such as ETFs and indices, to gain exposure to the broader financial market, rather than outperforming it.
Trading involves buying and selling securities within small time frames, usually ranging from seconds to weeks. Trading is more speculative than investing and involves the implementation of short-term strategies.
Traders tend to focus on which direction an asset’s price is likely to move, rather than the reason behind it. These moves might be driven by shock news events or other momentary pricing anomalies, which can be explained by technical analysis.
Trading requires active management of positions and the monitoring of news feeds. Traders are also likely to use risk management techniques, such as stop-loss orders, to automatically close out losing trades, rather than waiting for them to become profitable again.
Tip: Trading demands a lot more time and resources than investing. Administrative costs, commission and fees also tend to be higher because of the greater volume of trades being made.
The major difference between investing and trading is the length of time for which a position might typically be held. Investing can involve strategies with much longer time horizons, whereas traders aim to make profits from short-term price moves.
4“Trading involves ‘timing the market,’ whereas investing is all about ‘time in the market’.”
In addition, traders and investors set up, and engage with the markets, in different ways. The research required is different for both approaches, as are the risk management tools utilised.
Trading and investing have many similarities, and explaining the difference is best done with a commonly used phrase in the finance industry: trading involves “timing the market,” whereas investing is all about “time in the market.”