What separates profitable and unprofitable investors or traders lies in the ability to differentiate investing vs trading. Investing and trading are two primary objectives why someone enters into financial markets. Determining the objective is the first step to successful investing or trading. If you are new to the financial markets, this article on investment should be handy to get you started. I have shared the four steps every investor and trader need to know.
What are the differences between investing and trading?
Investing and trading are simply two objectives of participating in financial markets. Someone invests for wealth accumulation through the process of compounding. For example, an investor would expect to receive $200 in 5 years out of $100 that he set aside for investment today. Investing is for the long term. Therefore, he cannot access the $100 he has set aside within the next five years.
Due to the extended “lock-in” period in investment, some will prefer to trade instead. Trading takes a much shorter period. A trader will be able to buy and sell within hours. Some even do it within minutes. We call them scalpers. A trader can then use the trading profits to cover his daily expenses.
Why is it so important to differentiate investing from trading?
1. Different financial markets serve different objectives
In general, there are five financial markets available. They are equity, fixed income, commodities, forex and real estate markets. Not all of them are suitable for investing. Some are better for trading.
Equity, fixed income and real estate markets are more suitable to investors. On the other hand, commodities and forex market serve the traders better.
Once an investor or trader has decided on the financial market, it is time to choose the financial instrument.
2. Selection of financial instrument will depend on the selected market
There are various financial instruments available to investors or traders. Some examples include spot, options and futures. Spot instrument is suitable for investing, while the last two tend to serve traders.
3. Adoption of investment and trading strategy
The objective of entering the market will help to decide on the strategy to adopt. The two available strategies are fundamental and technical analysis. If you are investing, you may consider using fundamental analysis. For traders, you will be more profitable with technical analysis.
4. Opinions in financial news articles
When you are reading financial news or other investment articles, they will contain the opinion of others. These opinions may originate from an investor or trader. Unfortunately, these opinions may contradict each other. Therefore, you must understand the difference between investing and trading.
Should you invest or trade?
So, should you choose to invest or trade? Based on 15 years in the financial markets, I believe you should learn to invest first before trading. Just like any other profession, trading may amount to a full-time career. You may need to devote a substantial amount of time learning the skills.
