Trading and investing are very much like two sides of the same coin. They share quite a few similarities but are also different in some aspect.
To know where you stand in the trading versus investing game, you’ll need to know the main differences.
Differences between trading and investing
While both trading and investing involves the buying and selling of financial assets like stocks, there are distinct differences that will determine how you approach your wealth-growing strategy.
Short-term, day(s) or up to a few months
Long-term, up to months or even years
Involves a lot of buying and selling
Quick reaction towards market changes
Mostly buying and holding
Patience, to monitor and react only when necessary
Looking at the time horizon
One of the easiest way to decide if you should take on trading or investing is to know how long you’re in it for.
This will refer to the time you can spend monitoring and executing your trades or investment. Trading, in general, is a short-term activity. On a daily basis, you might spend up to two hours to trade when the market opens.
Trading is very much a fast-paced activity, where buying and selling of assets are done in a short time frame. The act itself is commonly known as day trading since the trade is usually executed in a single trading day when markets are open.
Traders need to be on the ball and know when they should seize opportunities in the market. In a short span of a few hours, they need to make quick decisions as the market moves frequently, with the aim to get a profit from these price movements.
This is a stark contrast to the investing route where the general consensus is that you’re in for the long run. Thus, you are less likely to keep monitoring the market movements.
On top of that, investing means you need to have a longer time horizon to monitor your investment. Perhaps the day has ended with a few dips in your assets, but that does not warrant an immediate reaction to sell the stock.
In short, investing is a game of patience and prudence when it comes to choosing the correct assets to manage.
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Staying committed to your goals
Just like a relationship, your commitment level can make or break your decision to trade or invest. Between investing and trading, it is good for you to take a check and see how much commitment you can give.
Think about the time you devote towards trading. For one, you’ll have to spend hours to do your due diligence. And by that, we mean researching and understanding the assets that you’re targeting.
The time you need to spend on analysing historical charts and graphs is not just a one-off thing. Just as you keep an eye on your trade, you’ll also need to do daily analysis when you’re trading.
With investing, you’ll need to take a stable and long-term approach. The process is about buying and holding on to an asset, often sticking with it through thick and thin. The endgame when it comes to investing is to see an eventual, long-term payout.
Nonetheless, staying committed with an investment is as important as it is with trading, though the former requires less daily maintenance. You need only to check in as and when you can. Plus, the whole point of investing is to let it grow with minimal intervention.
Rather, you monitor over a longer period and have more patience towards its execution so that your investment can ride out the market's ups and downs.
Brokerages such as IG can provide you with an edge if you have a limited amount of time to monitor your trades. Its app, for example, gives you timely notifications about market movements even when you’re on the move. Analysing the market trend is also made easy with visual graphs within the app that give you a quick snapshot of how the market is moving.
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Formulating the strategy
This is where you find the most distinct difference between trading and investing. With the former, you’ll have a lot of moving parts to manage on a daily basis.
As a trader, there’s a high likelihood that you will be managing multiple assets that you’ll be buying and selling within the same day. The premise behind trading is to take a very technical and real-time approach towards what you’re buying and selling at any given time.
Traders, however, must be firm with their decisions. When they monitor the prices, it’s important to know when it’s time to jump onto an opportunity to buy a potentially well-performing asset. Likewise, it’s equally crucial to know when they need to let go of an asset that’s heading south.
The key to executing a trade effectively is to always do your research. As mentioned, the level of commitment towards trading has to be high to ensure your trades are sound.
Here’s a tip - most of the trading groundwork has already been done for you by brokerages. Besides timely notifications on the IG app, you can monitor live prices to keep abreast of the market movement. More importantly, you can trade in real-time with apps on several platforms, allowing you to react on the go, almost instantly.
Investing, however, adopts a buy and hold methodology, focusing on the assets that you are sure of. Similar to trading, you need to do your due diligence to narrow down the shares, indices and various assets which has potential in giving returns in the long run.
Technical analysis of these assets, however, will not be as intensive as you would do for trading. You can take a more relaxed approach when monitoring your investments. That said, you still need to be well-equipped with your market news so that you know when to sell.
The merits of the trading route
When you look through the differences between investing and trading, it’s evident that each has its own strengths and weakness.
As a trader, you need to constantly be on the move, looking at the market and deciding how you intend to buy and sell when the opportunities arise. But what makes it stands apart is that you can see more immediate results in your trades.
Trading on a daily basis means you have a consistent yardstick to measure. Each day, as you do a technical analysis of how your assets are performing, you get a better sense of how you can enhance your next trade.
Likewise, the returns come in almost immediately. Your returns are calculated on a daily basis, so you know the gains (and losses) for you to adjust accordingly. With the right strategy, your gains are compounded in double-quick time. That’s because for every gain you make, the capital is increased accordingly. You can potentially use the additional capital to increase your overall returns with your trades.
However, this could go the other way if your losses exceed your deposits. There are ways to mitigate these risks, one of the ways will be the use of guaranteed stop loss orders implemented by brokerages such as IG. In such cases, you set a predetermined price to release the asset providing an extra protection during times of uncertainty. This applies to a value that’s higher than your initial capital too, so you can still turn that into a gain, albeit lower than your projection.
Trading is also highly flexible, in the sense that you can go long like what you do with investing, buying when it’s low and selling when it’s high. Further to that, you can go short with trading, which basically means you “borrow” to sell the stock and buy to return the stock to a brokerage when it’s lower. Likewise, the returns are based on the difference between the selling and buying price, but in this case, a stock that moves downwards would be in your favour.
The good news is, you can trade through Contract for Difference (CFD), which gives you the same exposure of a full trade at a fraction of the cost. Everything we’ve mentioned, from going long or short, to guaranteed stop loss orders, applies to CFDs too.
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Making the case for investing
If stability is the name of the game for you, then you’re more likely to lean towards investing. The real deciding factor, however, stems from the fact that you are less of a risk-taker and prefer steady returns over a longer period.
Simply put, you would rather sit back and wait for returns over a longer period rather than be constantly on your toes. On the flipside, investing does not give you immediate results as you are expected to hold your assets for a longer duration as they react slower to the market movements.
In short, having the patience to watch your assets move in the market, hopefully upwards, is an essential part of investing in order to ride out any market uncertainties along the way to receive a better return.
Most importantly, investing is mostly focused on buying assets that trend upwards. That would make it easier to monitor and decide when you should sell. It’s either go or no-go with investing. It goes upwards to a level you’re ready to let go or hits a point when you know you need to call it quits.
Should you trade AND invest?
The short answer is: yes. Diversify, that’s the magic word. Never put all your eggs in one basket, because despite all the planning and research that you’ve done, market forces are still unpredictable.
Remember, trades are conducted on a short-term, real-time duration. It takes a lot of effort to monitor and trade. Having your eye on the trade is crucial but if the market swings unexpectedly against you, that’s beyond your control.
A concurrent investment, which forms a higher percentage of your capital, can offset the unexpected trade. Your returns won’t be immediate and you have to strike off the losses for that particular trade. But in the long run, when you diversify your capital with a more stable investment, your overall gains from the investment would have covered the risk you took with the trade.
On their own, trading and investing each requires a substantial amount of capital to start. For some, that could be the barrier to entry. But that shouldn’t stop you because leveraged options such as CFDs let you jump onto the market at lower cost.
CFDs, in essence, allow you to gain as much as you would if you were to buy an actual stock, but at a fraction of the cost, in the range of maybe 10%. Your gains are calculated based on the actual size of your position, rather than a fraction based on your cost.
More importantly, CFDs bring more options to the table, including shares, indices, forex, commodities and even cryptocurrencies. Consider this - your portfolio’s diversification is now amplified at a lower cost. By doing so, you’ve performed an effective hedging to safeguard your assets against unforeseen market movements.
But always keep your eyes on the ball. Because while hedging is meant to offset potential losses, you’ll also need to do your due diligence to target assets that are less related to whatever you’re trading to ensure diversification. And remember, hedging is meant to safeguard your trading and investment. What it’s not is a profit-generating measure.
At the end of the day...
Deciding between investing or trading is still a personal choice. The only thing that you should take away from this, is that you need to be very aware of what you’re trading or investing in.
For that, you have ample resources online, including in-depth guides from IG Academy to help you figure out if you should be trading or investing.
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This article was sponsored by IG, the world’s No.1 CFD provider (by revenue excluding FX, 2018). All views, opinions and recommendations expressed in the article are the independent opinion of GoBear and do not in any way reflect the views, opinions, endorsements or recommendations, of IG Asia Pte Ltd (Co. Reg. No. 20051002K) (“IG”). Information is for educational purposes only and does not constitute any form of investment advice nor an offer or solicitation to invest in any financial instrument. No responsibility is accepted by IG for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of this information or material.