Learn the exact difference between trading vs investing in this article. Understand what works better for you to start a new career?
At every stage of life, we need money and people are earning money by doing the job, business, investing, and trading.
People are showing interest to understand the difference between trading vs investing. Because there is a large pool of money earning opportunities were available.
Investing and trading are two completely different things. In general, the goal of investors is to protect and increase their assets over a longer period of time through continuous investment.
Traders are more often short-term-oriented and have clear entry and exit positions. No option is better than the other, each approach has its advantages and disadvantages, and in this text, we will explain them in more detail.
Characteristics of Investors and Investing
When it comes to investing, one of the crucial factors is time. The investor first invests his time in researching the financial instrument he wants to buy.
If, for example, he thinks about buying shares of a company, he looks not only at the price but also at other aspects. It includes the balance sheets, quarterly and annual reports, management, development strategy, state of the industry.
Based on a lot of information he researches, the investor decides whether to invest or not and how much? Investors are known for their “buy and hold” strategy. By reinvesting dividend profits, long-term investors increase their portfolios.
As their time frame is often expressed in years, even decades, incidental corrections and market declines do not throw them out of the game.
This does not mean that investors never sell before the set deadline. Everyone, even the most successful investors, sometimes make wrong decisions.
The point is to see that and get out of position until there is a bigger loss. This is done by some of the most famous investors of today, such as Warren Buffett, Peter Lynch, George Soros.
Small Example of an Investor
Let’s take the example that the investment was successful and let’s say that you invested in Facebook shares 6 years ago. If you only kept the shares, in 6 years their value has increased by over 500%.
If your goal was short-term earnings, keep in mind that there were a lot of declines during this growing period. Therefore, the possibility of losing part of the money in the short term is much higher.
Specifically, in the period from January to April 2020, Facebook shares fell by about 40%. If you invested in January and sold in March, then you were in a big deficit.
It could, of course, be the other way around, we just give examples of how the same investment in the long and short term can bring different results.
Everyone should decide for themselves and assess their level of tolerance to risk and stress. The shorter the term, the greater the stress, and the same is true with trading.
Characteristics of Traders and Trading
Trading means more frequent investment in buying and selling positions. The goal is to make more money than by long-term “buy and hold” investment.
If 10% per year is a good return on investment for investors, for traders it can be a goal per month. Traders use technical analysis more than the fundamental one used by investors.
The most well-known indicators they use are moving averages, volume, RSI, Fibonacci, MACD, and, of course, price. To protect their positions, traders often use the “stop-loss” option or “take profit” to collect their earnings.
What are CryptoCurrencies? Recent Boom and Market Invasion
Cryptocurrency is decentralized digital money. It does not come under any bank or government and its value is the same around the whole world.
The first cryptocurrency called Bitcoin was introduced to common people in 2009. You could have heard about it.
Currently, there are more than 10,000 different types of cryptocurrencies.
This money is kept in a digital wallet with the utmost security and you can purchase anything online just like you do with real money.
The transaction of these cryptocurrencies is done through a highly encrypted program called block chaining and is stored in public records.
This is somewhat similar to a passbook where each person has their own copy tracking their transactions.
People find these cryptocurrencies more convenient because;
- Security is high, ie all your transactions are encrypted and are stored online with complex programs which are difficult to hack.
- They can be used to get real money by exchanging.
- Transactions occur between person to person making it fast and without any restrictions that we have with traditional banks.
- There are no or fewer transaction fees or limits in the transaction.
With all these benefits, more people are into cryptocurrencies making them more popular. The major change that cryptocurrencies brought to the world is the invasion into traditional trading.
CryptoCurrencies in Trading Vs Investing
It has overtaken traditional trading with its easiness to use and the non-involvement of intermediate peoples.
The interesting fact is that now many countries having their own currency value very low have decided to use cryptocurrency.
It is even found that many people are buying luxurious materials, as they can have a peer-to-peer transaction saving them a huge brokerage fee.
In short, cryptocurrency has become a growing payment system these days. With this huge entry into the market, it is considered an investment by many.
But is uncertain about its value because unlike stocks these don’t have a history to track in the investment field.
Still, investors in cryptocurrencies believe their value increases in future years and hence are being added to their investment portfolio.
Having some cryptocurrency in your portfolio is good in the sense of a change or variety because it hasn’t shown any correlation with other stocks in the market.
After all, all the investments are risky tasks.
Bitcoin Case Study and Why HODL Isn’t a Good Strategy?
The example of Bitcoin at this time last year best shows the advantage of trading over investing. We all know someone who is a supporter of HODL (hold on for dear life) tactics.
That is, they believe that Bitcoin will surely grow in the future and will not sell it even if their life depended on it. In particular, many people bought BTC at the all-time high of about $20,000.
The one who is only HODL, lost more than half of his money at that time because BTC was at below $10,000 for a very long period.
It is similar to, let’s say, sports betting when a bettor waits for an odd in a live bet at one of his favorite Indian betting sites to grow more before putting in money but the odd never goes up and he misses the opportunity to earn the expected winning.
- A good trader could earn a lot even during a drop in value. For example, he committed “sacrilege” and sold BTC at around $18,000.
- When the downtrend started in 2018 and then bought BTC again when it dropped to $11,000.
- Now there is more Bitcoin than before, and as BTC jumped to $17,000 after that, he is selling it again and again waiting for the opportunity to buy it at a lower price.
- BTC falls below $6,000 the trader buys again. BTC jumps to almost $12,000, the trader sells again. And so on.
- This is all but not easy, however, it is possible. Trading requires a lot of work, education, and discipline to be profitable in continuity.
For those who want to invest in cryptocurrencies, the purchase is done through exchange offices. One of the most popular exchange offices is CEX.io, where you can buy with a Bitcoin card as well as sell it by getting paid on the card.
Trading Styles (If You are Interested)
Trading style is directly dependent on the time you dedicate to it. There are short-term styles, such as “scalping” and “day-trading”, as well as long-term, such as “swing trading” and “position trading”.
Scalping requires spending time in front of the screen, constantly looking at charts for several hours a day.
It also requires very good concentration. One-minute charts are used here.
It is necessary to constantly monitor the market in order to open and close positions on time.
Not recommended for those who have another full-time job. Charts used: 5 minutes to 30 minutes.
You only need to check your positions a few times a day. Charts used: 1 to 4 hours.
You only need to check your positions once or twice a day. Charts used: 4 hours to 1 day.
Characteristics of Trading
- Transactions are performed in a very short period of time – from a few seconds to a few minutes
- Scalpers make a large number of transactions during the day, even hundreds of them
- They target small profits, only 5 to 10 peeps, even less; losses are also minimal
- This type of trader often enters large positions
- They often trade on a momentum basis, when there are sharp changes in the exchange rate
- Transactions are opened and closed during the day and last from a few minutes to several hours
- This style of trading requires great discipline and patience to wait for the right moment to enter the position
- Most daytraders base their trading on technical analysis
- The frequency of trading ranges from one to several transactions per day
- Daytraders try to capitalize on trend changes that occur during the day
- Transactions take from 2 to several days
- Swing traders try to predict medium-term trends
- Positions are held overnight as well
- Transactions last from a few days to a few months
- This style tries to predict long-term trends
- Positions are (of course) held overnight
Which Style to Choose?
- For example, if you are busy and cannot spend a lot of time trading during the day, then swing or position trading is the option that will suit you.
- If, on the other hand, you are not employed and can follow the charts during the day, then you can go for day trading or scalping.
If you want to use fundamental analysis, then a long-term trading style is better for you.
Every investor and trader has different needs, goals, sources of funds, and time at their disposal. So, the best style the one that best meets your needs and capabilities.
Which is Better? Trading vs Investing?
Trader and investor both are two different people trying to gain profit through different methods. The investor seeks for bigger return over a long period of buying and holding stocks.
Whereas, a trader buys and sells his stock with the fall and rise in the market making smaller profits, more frequently, in a short time period.
The aim of both the people is the same, but their way of getting profit is different. Which is better for you depends on your ability to take risks and patience to hold stock.
When you ask me to compare, I would say trading is a bit riskier than investing. There are two reasons.
- It requires a lot of guesswork.
- It will be difficult to keep track of more than a few trades at a time.
This doesn’t mean trading is not worth it. It does provide higher returns. But if you don’t wish to take risks. The investment will be better.
If you are new to the world of the stock market, it’s quite natural to have confusion about which one is better, trading vs investing?
But you could easily decide which one to choose because this depends on your identity and behavior. Having explained what is investing and trading, you can figure out which you want.
If trading asks for making quick decisions, discipline, and continuous tracking, Investing helps you to relax and wait for a long time to get some return.
But when you invest for a long time, if the value of stock declined by the period you try to sell your stock, You will lose your money and time on that investment.
In this situation, trading is good as you can sell your stock soon if you feel the market is going to drop.
So both have their own advantages and disadvantages. It’s up to you to decide which suits you and how fast you need the profit etc.
I hope you have come to a decision after reading this. Because I am no one to tell you “You should choose to trade” or “You should invest”. It is your money and you need to decide.
Hope this article helped you at least to understand the basic.