Investing and Trading, What Should I Choose?
Early retirement and financial independence is the dream for most. Yet, making that dream a reality seems impossible on a 9 – 5 income. In the words of investor extraordinaire Warren Buffett, “if you don’t find a way to make money while you sleep, you will work until you die.” Heeding these words, you’ve decided to try your hand at buying and selling securities — stocks, bonds, and options. However, you’re still trying to find out which strategy is best for you, trading or investing.
Start trading or investing right now with Interactive Brokers!What is Trading?
Trading involves buying and selling securities, usually stocks, regularly to make a short-term profit. The chief mantra of a trader has always been, “buy low, sell high.” This means buying a stock when its price is low and selling it when its high to make a profit. Typically, traders buy and sell based on short-term variations in the stock price. “Day trading” refers to buying and selling within a single day; “Swing trading” refers to buying and selling based on market “swings” that could span days, weeks, or months.
Because there’s no way to know for sure what the stock market will do in the future, trading carries a significant amount of risk. To minimize risk, traders use several stock prediction techniques. The most common are technical analysis and statistical patterns that show which direction a stock price will probably move.
What is Investing?
Investing involves the buying and selling of securities over long periods of time, typically years or decades. If the mantra for trading is “buy low, sell high, then the mantra for investing is “buy and hold.” This means investors buy securities and hold them until their market prices are high enough to make a substantial profit off sales
There are two main types of investing: passive and active. Passive investing involves very little buying and selling of securities. Typically, passive investors buy index funds that are highly diversified and track the value of some aspect of the total market. Active investing takes a more “hands-on” approach. It typically involves a portfolio manager who buys and sells securities on their client’s behalf. They attempt to “beat” the returns of the total market. Mutual funds are usually actively managed.
Much like trading, investing also carries risks. To minimize risk, investors diversify their portfolios. This means they spread their investments around to balance risks and rewards. Moreover, investors may also engage in fundamental analysis which determines the value of a company.
6 Key Differences between Investing and Trading
Now that we’ve provided general definitions of investing and trading, it’s time to discuss their differences in more detail.
“Timing the market” vs “time in the market”
Traders are ultimately looking for short-term profits. So, the period between the time of purchase and the time of sale could span from a few seconds to a few months. Their decisions to buy or sell depend on “timing the market”—or predicting the best opportunity to buy or sell.
Investors, however, hold onto stocks that may grow in value over years or decades. In other words, they focus on “time in the market.”
Analyzing the Market
While both traders and investors try to predict the market, their decisions to buy and sell are based on almost completely different analytical strategies. For instance, traders use technical analysis and statistical patterns of historical data to predict future market performance. Investors, however, use fundamental analysis to determine whether a company is undervalued or overvalued compared to its stock price.
Gauging Risks
Both trading and investing can be risky. Yet, trading is riskier because it’s possible to lose a lot of money in a short period of time. Buying low and selling high is easier said than done. Even if a stock price is lower today than it was yesterday or a month or year ago, there’s no way to know for sure the stock price won’t continue to plummet. In which case, you may lose your money. The risk is compounded for traders who leverage other people’s money to purchase securities.
Investors take on fewer risks because they create diversified portfolios. Diversification involves spreading their investments across industries, asset classes, and geographical regions. Financial instruments like index funds, mutual funds, and exchange-traded funds (ETFs) are great ways to maximize diversity.
Expected Returns
When it comes to the financial markets, the higher the risk, the higher the rewards. Trading can yield outstanding returns of hundreds of percent per year. Tesla stock, for example, skyrocketed by 700% in 2020, and another 50% in 2023. Some traders made millions! However, traders lost millions when the Dot Com Bubble burst in 2000.
It’s almost impossible for investors to make such high returns as traders do. Most astute investors can expect anywhere between 10-20% a year. This is nothing to scoff at, especially given the lower risk of a diversified portfolio and the general upward trend of the financial market over long periods. The S&P 500, for example, yielded an average yearly return of over 10%, despite several stock market crashes.
Time Spent
When it comes to buying and selling securities, you’re not just spending money, you’re also spending time. If you treat trading like a hobby, then you probably spend 5 or 6 hours a week playing the market in addition to full-time job. Active day traders, however, treat trading like a business—it’s a full-time job. It requires a constant presence in the market lest you miss out on opportunities.
Because investors buy and hold securities, the frequency of transactions is a lot lower. This frees up ample time to earn money from a business or work. Most investors take a passive approach towards their investments, letting the market grow their money
Emotional involvement
If trading is an emotional rollercoaster ride, then investing is like a Sunday drive. Traders have a heightened sensitivity to the constant fluctuations of the market on a daily basis. It’s not uncommon for them to experience periodic episodes of ecstasy and misery throughout the course of a single day depending on the success of their trading decisions. Given the high monetary stakes of their decisions, trading can be an emotionally demanding practice. Investing, however, takes very little emotional involvement. They can be generally confident that their diversified portfolio will continue to rise, albeit at a slower pace. The only way they could lose a substantial sum of money is if they sold their securities during a market crash, or if the companies they’ve invested in went bankrupt without warning.
Investing vs Trading - Which is Better For Me?
To determine which market strategy is best for you, it’s important to consider what your goals and priorities are. Investing is suitable for almost anyone who wants to secure a future through capital growth. These people may have families of their own, so taking on too much risk may undermine their financial security and future prosperity. A diversified portfolio can be formed from low-cost index funds or professionally managed mutual funds. As investors, they don’t need to spend too much time or emotional energy monitoring the market and seizing opportunities.
Trading is suitable for people who have the time to learn and practice stock market prediction. The potential profit of trading is higher, but it is worth considering its growing risks. Active day traders should have already amassed enough wealth to get by in case the market makes unexpected turns—which it does regularly. Too many bad days in a row can be for the unprepared trader.
Best Brokers For Trading and Investing
Interactive Brokers - Best for Investing
Founded in 1993, Interactive Brokers is the largest online trading platform in the United States based on the daily average revenue trade (DART). This company is known for its massive selection of tradable securities, low commissions and margin rates, and several IRA-eligible accounts.
FXTM – Best for Forex Trading
Founded in 2011, FXTM is a global leader in online trading. Forex — “foreign exchange”—is one of the best markets to trade because of its massive daily trading volume, exceeding 6 trillion. This high volume of trading makes forex the most liquid market, meaning assets are traded with minimal impact on their value.
Fidelity Investments – Best For Beginners and Experts alike
Founded in 1946, Fidelity Investments offers a wide variety of financial services, ranging from asset management, investment advice, and retirement planning. It also operates a brokerage firm that offers commission-free online trading and eliminated most account fees. What stands Fidelity Investment apart is its extensive collection of education resources.
Summary
Traders buy and sell securities frequently to make quick profits, while investors buy and hold onto securities to make capital growth over time
Traders look at historical data to predict the market, while investors look at fundamentals to determine the value of a company
Traders manage risk by utilizing market prediction techniques, while investors diversify their portfolios
Trading follows the “high risk, high reward” principle, while investors take lower risk for more certain returns
Traders spend more time and energy monitoring the market, while investors allow the market to grow their wealth with minimal intervention
FAQs
Do I need a lot of money to start trading or investing?
No, all you need is enough money to open an account, which could be as low as $10. Then you’ll need enough to purchase securities, which could range from pennies to thousands of dollars.
Could I be an investor AND a trader?
Certainty. Nothing is stopping you from holding some securities for a long period of time while trading others on a daily basis. If you’re thinking about trading, then including some investments may reduce the risk of financial ruin.
Could I lose all of my money?
Yes. For instance, if you buy a stock in a company that goes bankrupt, you will lose your money. However, if you have a diversified portfolio including index funds and ETFs, then it would take something more akin to a global apocalypse to lose all of your money in the market.
Is it possible to beat the average returns of the market?
Yes, it’s possible. There are plenty of mutual funds that exceed the annual return of, say, the S&P 500. However, the question is whether or not it is possible to beat the market in the long term.
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Team that worked on the article
Mikhail Vnuchkov joined Traders Union as an author in 2020. He began his professional career as a journalist-observer at a small online financial publication, where he covered global economic events and discussed their impact on the segment of financial investment, including investor income. With five years of experience in finance, Mikhail joined Traders Union team, where he is in charge of forming the pool of latest news for traders, who trade stocks, cryptocurrencies, Forex instruments and fixed income.
The area of responsibility of Mikhail includes covering the news of currency and stock markets, fact checking, updating and editing the content published on the Traders Union website. He successfully analyzes complex financial issues and explains their meaning in simple and understandable language for ordinary people. Mikhail generates content that provides full contact with the readers.
Mikhail’s motto: Learn something new and share your experience – never stop!
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.
Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.