If you’re planning to dive into the world of financial markets, you have many options to choose from. Usually, beginners tend to choose between trading and investing. But first, you should know the basic information and the difference between these two.
In this article, we’ll discuss the basic things you should know about these financial strategies, and help you make the right decision.
Investing
Investing is a strategy that involves buying and selling underlying assets, such as bonds, stocks, and funds, expecting that their investment will increase over time. This is why investing is also known as the gradual building of wealth.
Key Characteristics of Investing
1. Long-term horizon
As mentioned, investing is holding onto assets for a long period, which can last for years or even decades. Instead of getting a profit immediately, investing is about storing your capital for later and making a profit.
It’s similar to property investment. If you invest in a house, it’s not likely that you’ll sell it right away. You can either live there or rent it out while making sure it stays in great condition. The more improvements you make, the higher the value of the property once you decide to sell it. Of course, there are other factors to consider, but it’s the initial basis.
2. Fundamental Analysis
Investors rely on the fundamental analysis more than the technical analysis. Since fundamental analysis focuses on the intrinsic value, or knowing the worth of underlying assets, it can help in deciding on the right investment.
Some of the tools investors use in fundamental analysis are news, financial reports, interest rates, and economic indicators.
For instance, if you’re planning to invest in company stocks, you should get to know the company well. Besides, you’re trusting them with your money, so you should be extra careful.
3. Lower Transaction Frequency
Since investing requires huge capital and is done on a long-term horizon, there’s also lower transaction frequency. This means you don’t have to spend much time tracking the status of the market or the value of the stocks.
Besides, the daily ups and downs of the stock value don’t have a significant impact on your investment. So if you have other things to do, like a full-time job, managing a business, or other hobbies, this is the ideal way to get started with financial markets.
Advantages of Investing
1. Compounding Returns
Due to the long-term holding of an assent, you can get more benefits from compounding returns. It’s the result of earning from your returns, and not just from the original investment.
2. Lower Transaction Costs
Fewer transactions require less additional rates, such as hidden fees, commissions, and transaction payments. Meanwhile, when investing in an underlying asset, it’s guaranteed that you can make one to few investments from time to time.
3. Reduced Emotional Stress
Long-term investments ensure that the daily fluctuations and market volatility don’t affect your capital. This is a great thing since you can still focus on other things in life.
Trading
Trading is the way to make profits in the short term by buying and selling assets, like currencies, stocks, and commodities. In addition, the goal of trading is to buy assets at a low price and sell them at a higher price.
Key Characteristics of Trading
1. Short-Term Horizon
Financial markets often change, and traders take advantage of the frequent changes to earn money. Nowadays, you can trade whenever and wherever you are, as long as you have a trading account. For instance, if you know how to trade shares, you can follow any company-related news and other factors that can affect your trading decisions.
Since you can open and close trades instantly, you should be aware of the best time to do so. Although you can trade for a long time, it’s still not the same as when investing.
2. Technical Analysis
Investors mainly use fundamental analysis while traders often use technical analysis. Although you can still use whatever you choose, most traders use technical analysis to predict the future price of an underlying asset.
Since trading is usually done in the short term, you should be able to open or close trades in a matter of seconds. If not, the market may shift again which can ruin your plans.
3. Higher Transaction Frequency
Due to the short-term placement of trades, there’s also higher transaction frequency compared to investing. However, this includes more opportunities to make a profit.
In terms of fees, you may encounter more as compared to when you’re investing in the long term.
Advantages of Trading
1. Quick Profits
More opportunities include a higher chance of gaining profits in a short period. The more often you trade, the more chances of earning quickly.
2. Adaptability
Since traders trade often, the time will come when they can easily adapt to changes in the financial markets. This can also help them create a better trading strategy.
3. Potential for Income
Trading often may result in a better trading portfolio. In addition, with enough experience, you can even use trading as a regular source of income.
Choosing the Right Path for You
Deciding whether you want to invest or trade depends upon many factors, such as level of commitment, knowledge, expertise, and financial goals. In addition, it may take a while before you can decide which is the right way to go. But in the meantime, try to learn as many things as possible, so that you can make an informed decision.
We hope this article helps you get to know the difference between trading and investing, and the ways you can do to maximise making income with both financial strategies. Although it’s not that easy to choose, there are also ways to try them both. If you want to add more to this discussion, please don’t hesitate to add a comment below!
ABOUT THE AUTHOR
Aliana Baraquio has over 5 years of experience as a writer and market analyst. She specializes in developing beginner-friendly trading techniques and tutorials. Additionally, she suggests FP Markets as the top broker for trading CFDs and Forex.
