When deciding to get into the different financial markets, it’s important to know and understand the different terms, wording and abbreviations used in order to avoid any confusion and risk making trading mistakes. One thing that should be understood as early as possible is the difference between trading and investing and what this could mean for your investments and portfolio. Let’s take a look at the differences between trading and investing and how you should consider them when making your financial decisions.
Are There Any Differences Between The Two Terms?
The terms “trading” and “investing” tend to be used interchangeably, which adds to the reasoning as to why there is often confusion between the terms. Both involve opening an account using a broker, as well as trading, selling and buying assets such as stocks, ETFs and cryptocurrencies. However, there are differences between the approaches.
What Is Investing?
Investing is where you buy assets with the sole aim of making a financial return in the long term. The length of this is largely determined by your individual circumstances and decisions. Some people will choose to invest in order to achieve some form of financial independence, while others will do it with the goal to fund celebrations or education. No matter the aim, with investing, this process usually involves a strategy and timeline of around a year.
Investors typically will choose assets in which they expect to make a financial return and which will increase in value in line with their strategic timeline. With investment portfolios, there is no definitive rules as to which assets should be used, and many investors choose to create a diversified portfolio in order to strengthen their returns.
What Is Trading?
Trading involves the buying and selling of securities in a much shorter time frame than investments, typically ranging from just a few seconds to weeks. Compared to investments, trading is much more speculative and uses short term strategies. With trading, traders will focus on which direction an asset is likely to go, as opposed to the reasoning behind it. In most cases, these moves will be made on news events or smaller, momentary pricing changes.
Trading requires a much more active management of portfolios and involves more risk than investing, due to the short-term strategies used, and can mean that return on investment is less likely. Trading also requires more time, management and active resources than investments and fees, commission and administration costs will tend to be higher. As trading is much more pressurised and open to short term changes and fluctuations, this also opens traders up to things such as broker scams or misinformation.
So, Are Trading and Investing The Same Thing?
Trading and investing are not the same thing. Trading involves the process of buying and selling assets, such as stocks and bonds, to make short-term gains. Traders will typically use share prices to make their decisions, whereas investors on the other hand will tend to focus on long term investments and returns.
Trading is generally more complex than investing, as trading requires a near constant monitoring of market conditions and traders need to have a better understanding of how assets and markets work and operate.