Investing and trading are fundamentally the same action, but are executed in different ways and for different reasons.
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One way to think of it: Investing is to trading as a sedan is to a sports car. With the latter pair, both are vehicles, built with the same basic parts and for the same basic purpose—to get you from point A to point B. But the sedan is typically considered a safe and reliable mode of transportation while the sports car is considered a fast and exciting ride. Investing and trading share a comparable relationship.
So, how exactly are investing and trading the same?
Boiled down, both are ways to grow your money that involves buying and selling shares, bonds and other assets. Or that’s the hope anyway. Both actions also involve various levels of risk that may cause you to lose money instead.
Which is riskier - investing or trading?
Without a doubt, trading is riskier. The goal for trading is to turn over your investments quickly in an attempt to make some fast cash. How fast? It could be a matter of weeks, days, or even minutes. And timing is everything. Traders are all about swooping in at just the right moment, likely when the share (or other type of asset) is priced below what they think is fair for whatever reason.
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For example, let’s say a certain company was in the news because its CEO was going through a costly divorce. Such headlines might drive some shareholders away and share prices down in the short term, but whether they have any long-term effect on the business and share could be another story. So traders might be compelled in these types of situations to buy on the dip and sell soon after, once prices bounce back up. This strategy can turn a tidy profit in a short amount of time.
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Then again, market timing is quite a risky bet. After all, nobody can accurately tell the future and know exactly how events will unfold. And if what a trader expects to be a momentary dip in share price turns into a prolonged rout, traders can lose out because their strategy doesn’t really allow for extra time to recover, if necessary. Instead, it locks in short-term losses.
How is Investing different?
Investing, on the other hand, is all about the long game. Instead of focusing on and trying to capitalize off of individual investments’ short-term price fluctuations, investors keep their eyes on their own long-term financial goals. That means maintaining a diversified portfolio, in which some assets might win when others lose, and planning to hold investments long enough to make day-to-day movements negligible. It also means taking advantage of the fact that the stock market has generally headed upward throughout history over the long term.
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Sure, from time to time, we’ve seen long-ish downward market slides (called bear markets), and investors are not immune to losses. But focusing on the long-term comes with built-in flexibility, and an investor’s strategy allows for time to wait out periods of loss.
Which one should I be doing?
For financial thrill-seekers, there’s the potential fun of trading. But it’s important to know that if you choose to explore that route, trading should be reserved for your fun money—i.e., a small portion of your overall portfolio that you wouldn’t mind kissing goodbye.
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Also, would-be traders should keep in mind that each transaction could cost you, both in more trading fees and higher tax rates. Plus, the strategy may require a greater time commitment as well. You need to spend a lot of time researching and monitoring each potential investment, and then keep your hand on the buzzer, ready to buy and sell at just the right moment.
Overall, though, for your long-term goals, and if you’re a typical individual investor, investing is the way to go. It might not be as exciting as trading, but when it comes to your money, isn’t boring beautiful? You can set up an initial strategy and portfolio and just sit back and watch your account slowly grow.
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Or don’t even watch; just check in periodically, rebalance your portfolio as necessary, and let your investments do all the work. In fact, many experts recommend ignoring your investments for long stretches of time. Doing so can help you stay blissfully unaware of the daily ups and downs that might tempt you into trader behavior. That way you can stay focused on the true purpose of investing—achieving all your long-term financial goals.
Investing involves risk including loss of principal. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
