Investing vs Trading: What Is the Difference?
Although sometimes used interchangeably, trading and investing are two different methods of attempting to create wealth in the financial markets.
But what is the difference between trading and investing? In this article, we examine trading vs investing, highlight the distinctions and look at which, if either, is better than the other.
Table of Contents
Trading and Investing Explained
Investors and traders both enter the financial market for the same purpose, to attempt to create profit. However, whilst they share a common goal, the manner in which they attempt to achieve that goal differs.
If we could use one word to define that difference, it would be time.
Generally speaking, investing is a long-term approach of attempting to make money in the financial markets, whereas trading typically involves shorter-term transactions. In the following sections, we will look at investing vs trading in more detail.
Investing
The aim of investing is to create wealth over the long term, most commonly by buying and holding financial instruments, such as stocks, bonds or mutual funds.
Investors are not typically interested in short-term price movements, instead taking a more holistic approach to the financial markets. They are more interested in the overall growth of their investment and are happy to wait an extended period of time for this growth to take place.
A lot of people reading this will already be making regular investments, whether or not you realise it. Paying money into a pension, whether publicly or privately, is investing money towards your retirement. You may not be actively managing your portfolio, or paying any attention to it, but you are still investing your money and have delegated the day to day management to somebody else.
Trading
On the other hand, trading is all about exploiting short-term price movements in the financial markets. Traders speculate on both rising and falling prices with the goal of generating smaller, but more regular, profits.
Due to the short-term nature of trading, it is a much more hands on experience than that of ‘buy and hold’ investing. Traders spend a lot of time looking at price charts and thinking about their next move, whilst entering and exiting the market on a far more frequent basis.
They analyse the financial markets, seeking the right time to both enter the market and to exit it in order to maximise profit or to limit losses. Whilst an investor may not be too concerned over a temporary dip in the market, as they are looking at the bigger picture, successful traders tend to cut their losses quickly.
The Difference Between Trading and Investing Analysis
So far, we have looked trading vs investing largely on the basis of the time period involved. However, there are other factors we could look at to highlight the difference between trading and investing, one of which is the type of analysis used to make decisions.
Fundamental Analysis
When it comes to investing, market participants tend to be mainly interested in fundamental analysis. This type of analysis looks in detail at macroeconomic factors as well as the performance and results of the company, fund or market in question.
For example, when an investor analyses the stock of a company, they will examine the general state of the economy, how the relevant industry is performing and also scrutinise the company’s past financial results and current state of affairs.
This analysis is important in being able to choose a suitable investment which will provide the long-term growth an investor is looking for.
Technical Analysis
On the other hand, whilst traders may employ elements of fundamental analysis within their decision making process, their focus tends to mainly be on technical analysis.
Technical analysis is the practice of using historical price data to predict future movements in price. Traders conduct this analysis on an asset’s price chart with the assistance of technical indicators and will usually have predetermined criteria which need to be satisfied in order for them to enter and exit a position.
Which Is Better Trading or Investing?
As with many things in life, there is no right or wrong answer to this question. Neither is necessarily more profitable nor has more chances of success than the other.
Which is better between trading vs investing depends entirely on the person in question. Somebody who wants to be constantly active in the markets whilst attempting to secure short term profits may be better suited to trading.
However, somebody who prefers the idea of taking a more passive route and looking to build up steady profits over a longer period of time might be more drawn to investing.
Investing vs Trading: Which is Riskier?
In terms of risk, it is generally accepted that, when it comes to the financial markets, the shorter the time period, the greater the risk.
This is due to the fact that traders, particularly ones with the shortest time horizon, enter and exit the market far more frequently than investors. To put it simply, the more often you enter the market, the more likely you are to lose money.
Moreover, many traders tend to trade on leverage, meaning that they are accessing larger market positions with a lower deposit. These larger positions allow traders to magnify their profits when the market moves in their favour. Nevertheless, when the market moves against them, their losses are magnified to the same extent.
Naturally, that is not to say that investing is without risk because, of course, that is not the case. Investing and trading both come with a high risk of losing capital and both should be approached with caution by all market participants.
How to Start Trading and Investing
At Admiral Markets, we offer both trading and investing accounts which provide access to over 8,000 financial instruments between them.
However, before embarking on an investing or trading journey, it is important to familiarise yourself with the intricacies of the financial markets. Using a demo account can be a great way of doing this, allowing you to practise trading and investing with in realistic market conditions before risking your capital on the live markets.
Click the banner below to open a demo trading account today:
Trading vs Investing FAQ
Is trading and investing the same thing?
No. Although the terms are often used interchangeably, trading and investing are two different methods of attempting to profit in the financial markets. Typically, trading takes place over a short time horizon, with traders attempting to exploit short term price movements. Investing, on the other hand, is a longer-term approach which typically involves buying and holding assets.
How to learn about trading and investing?
At Admiral Markets, we have a wide range of free material to help you navigate the financial markets, including a constantly growing library of educational articles, regular webinars and a trading news blog.
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About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
