Trading and investing may seem similar in a lot of ways. Both phenomena are applied while trading in the financial market. However, both factors are used differently by traders. Moreover, their implications are distinct. The pursuit of a goal is distinct to users. Trading vs investing is quite debatable in those aspects that serve a similar purpose. Also, with different avenues of investments, market players can excel in the financial space.
Traders can invest and trade in stocks, bonds, commodities, cryptocurrencies, metals, forex, indices, derivatives, and others.
All traders and investors alike take the route to financial markets to earn profits and increase their wealth.
However, if you go by Warren Edward Buffet, CEO and Chairman of Berkshire Hathaway, if you can’t hold stock or investment into an asset for 10 years, you should not invest in that even for 10 minutes. That’s the philosophy he follows put into abstract words. But the crux is, investment is a long-term key, while trading happens quickly.
What is trading?
In trading, a trader is involved or consumed in the financial market. A trader submerges in a vigorous process where a market player can put their money and sell within minutes or hold until the day’s end. It can be executed in any financial product you trade. Success in the financial market depends completely on the trading skills of a trader. One has to accumulate that with experience. It highlights trading vs investing and which phenomenon can interest professional market players.
So, that cannot be bought but earned through enormous dedication, sincerity, vision for growth, and multitude trading. A trader has to follow a stock or a forex currency, study that and then take a plunge. That’s the process. One has to chalk out a plan and stick to strategies. Furthermore, picking up the right broker is equally essential.
Brokerage firms like Brokereo, TradedWell, 101investing, ROinvesting, Global TradeATF, ETFinance, etc. can serve the best trading environment for all market participants.
Who’s a trader?
A trader is an individual who takes involvement in the selling and buying of an asset that can be stock, index, forex, commodity, etc. Here, the duration or holding capacity of a person is usually less. He or she would like to take up an asset for the maximum duration of a day. That’s the highest stretch one can go to. Hence, any profit or loss incurred during that cycle or period belongs to a trader.
He/She has to be in the influence of an arbitrageur, hedger, agent, speculator for performing in the market. It aids in knowing the distinction regarding trading vs investing.
Different types of traders
Here are some of the traders who indulge in the financial market for earning money:-
- Local trader
- Stock trader
- Floor trader
- Scalping trader
- Pattern day trader
- High-frequency trader
- Rogue trader
All traders have one thing in common that they do not stick to the market for too long. Instead, they make gains and move on and find some other derivative, instrument, or asset for accumulating wealth.
Scalping trader:- It is the shortest form of trading where a trader buys and holds an asset or security for a little time that pans for a few moments to some minutes and sells by earning some profit. The process continues until the day.
These fewer profits when aggregated ensure a bigger gain for a trader in a day. Also, the risk is lesser. Moreover, it is conducive to small traders, who do not have big pockets or have lesser experience in the financial market. Furthermore, it clears out the difference between trading vs investing.
Floor trader:- A floor trader is an active member of a commodity or stock exchange who indulges in trading on the floor for his/her account on that exchange. However, the rules and regulations need to be followed by a trader designed by the exchange. Moreover, one should not confuse the term with floor broker. Some people do that.
Rogue trader:- A rogue trader has the responsibility to trade on behalf of his/her employer. Thus, such traders are employed for trading. However, there are certain conditions applied to them. These traders play with high-risk investments. Thus, there may be a loss of funds sometimes. Thus, it presents the difference between trading vs investing aptly.
Pattern day trader:- It is considered a regulatory designation for investors and traders who use margin accounts over five business days and execute four or more trades. It is also called PDT. Moreover, the day trades’ numbers should be around or more than 6 per cent of the margin.
High frequency trader:- This type of trading uses powerful computer programming for transacting a huge number of orders swiftly. It is also known as HFT and characterised by huge turnover rates.
HFT has negated the impact of bid-ask spreads to an extent.
Local trader:- A local trader has the single largest motto of earning quick benefits by selling and buying different securities in a stipulated time. Names like floor trader, registered trader, and competitive trader are used for a local trader in the financial market. The main job of these traders is to maintain liquidity in the market.
Stock trader: A stock trader is the one who trades in the stock market, buys and sells different companies’ shares for earning profits. A stock trader can be a hedger, an agent, stockbroker, speculator, etc. Such traders can trade using their own account called proprietary trading. It is the perfect illustration for trading vs investing.
What is investing?
When we talk about investing, it comes with an understanding of the long-term approach. It means a person would put the money in the market undeterred by short interferences of the financial market. The main aim of the investment is to accumulate huge wealth gradually with time. Thus, people invest in mutual funds, life insurances, bonds, a basket of stocks, and other dimensions that can help in growing money.
In trading, people do not hold their securities or funds for a long period of time. However, during investment, investors keep their money in their portfolio for years to decades until they reach the objective of profits.
When these investors invest in a stock market, they receive several perks like interest, dividends, stock splits, and lesser risk. Even the downtrends do not affect them because the perspective is bigger.
Types of investments
An investor has plenty of options for putting funds and enjoying perks offered by the market. You can think of a plethora of ways that feature lesser risks and bigger advantages in the long term. It can list out differences between trading vs investing.
Some of the common forms of investments include:-
- Real Estate
- Mutual Funds
Stocks are used by both traders and investors. However, someone who wants to earn sustainable money needs to invest in the stock market with a long-term perspective. For this, one needs to pick up a blue-chip stock that can render better dividends and exhibit a leap of growth during regular time intervals.
Moreover, small corrections do not matter in the stock market when you invest with a long-term idea. It is the bigger target that matters. So, many people invest in it for at least a few months to years until their objective is met.
Hence, the headache of buying and selling regularly ends here. Instead, one has to put in the money and patiently wait for the right time. Moreover, long-term investments in stock help in drawing a good chunk of dividends. Thus, that’s icing on the cake.
These are considered another sustainable investment method that provides considerable return every year, which is almost twice the inflation rate. Thus, people looking to invest here can rest assured of their profits. Mutual funds pool money from multiple investors and invest that into several other sectors for drawing bigger profits. Those gains are then distributed among mutual fund investors. However, the process is long. Hence, investors needs to be patient.
Professional money managers are there to look after mutual funds. They determine and chalk out the plan to distribute the money received that can offer better returns. In addition, the expense ratio is kept in check that helps in acknowledging funds and keeping a check on the market.
Hence, these funds are professionally managed so the risk is lesser while in a long-term, the profits can magnify.
The real estate market is one of the most profitable ones. However, the capital it requires is bigger than any other financial market. So, one cannot buy or sell it instantly. It needs watchful eyes and a conducive opportunity where an investor can buy a piece of land or property at a reasonable price and sell it at a higher price.
But that’s the nature of the real estate, it may take years to decades before it touches the milestone set by an investor before putting it out for sale.
Moreover, properties are resistant to inflation. Therefore, investors take their chance to invest in it as a safe option. Furthermore, several nations offer several tax benefits to the owner of a property. So, there are additional benefits to it.
Additionally, people can take mortgages and rent their properties to earn money. These advantages cannot be availed from other avenues of the financial market.
The insurance sector is one of the safest ways of investment. An investor will always make profits from it because the characteristic of the insurance stems from a long-term investment. Investors have to pay a certain premium depending on the type of insurance for a fixed time. After that, they start receiving returns every month or as a one-time payment. There’s a fixed percentage of interest rate which remains unaffected by recession and inflation.
Hence, it is one of the safest investments, but a long-term one. However, unlike other investments, it comes with a guaranteed profit.
Also, some countries render tax benefits to those with insurance. So, that’s one more reason why people look up to the market.
If you are looking forward to commodities for a long-term investment, then you must know that not all of them can be considered profitable. It is great to invest in precious metals like gold, silver, and platinum. They provide profits when the market is not performing well, especially the yellow metal.
Gold is often traded against inflation and is considered a safe haven by several investors. Whenever the US dollar or the financial market plunges, people find refuge in the precious metal. It draws a distinction between trading vs investing
Moreover, it can be sold in the offline and online markets with equal panache. Also, commodities like grains and materials that do not corrode or remain intact in all seasons are good for long-term investments.
A bond is also known as the fixed income instrument where an investor rest-assured profits at the end of the term. It represents a loan. It’s precisely an IOU bet between a borrower and the lender. It exhibits a major difference between trading vs investing.
Both trading and investment are required for an economy to prosper. There are like two wheels of a motorbike. Thus, financial markets need them to function well for the smooth functioning of industries and other sectors. The major difference between the two is time. In trading, one keeps the money in the market for a smaller period, while it is elongated to months, years, and decades during investment.
So, in trading vs investing, both are important methods to draw money. Market players can use brokers like Brokereo, and others for entering different forms. Hence, never feel bemused whether to invest or trade. The brokerage firms will guide you.