Last Updated on 3 November, 2022 by Samuelsson
Is trading better than investing? These two terms may seem quite similar to you if you’re just starting out, but there are major differences between them. Before you officially enter the market, research can help you get a clear idea of these two concepts and you can choose accordingly.
Trading is better than investing when you are looking to gain profit quickly. However, trading also comes with a high degree of risk and is less recommended to people with little experience in the financial area. So you should carefully consider your objectives in order to choose the best way for you to move forward.
For a newcomer to the markets, many questions may arise before they could come to a conclusion as to whether they should trade or take the investment route. To make your way through the financial market easier at the beginning, we have covered some of the main aspects of the two in this article.
What is the Difference between Investing and Trading?
Investing and trading are both tools used in the financial market that help the investors make profit and achieve their financial goals. However, major differences include the timeline in which you gain the fortune and the degree of risk involved in each of the two options.
Investing is about building your wealth gradually over time through buying stocks, bonds, mutual funds, etc. and holding them. On the other hand, trading is about transacting frequently like buying stocks, currency pairs, commodities, etc. and selling them for a profit. Here your goal is to get returns which outperform the buy-and-hold investing.
Which Is Easier To Learn?
On the financial market, there is no simple way to gain profit fast and easy. However, some tools are easier to learn than others. Investing may be simpler to understand for some people, being a financial strategy focussing on buying stocks and keeping them for a long time.
However, while active investing is not easy, trading is even harder. Investors could essentially buy an index fund and get nice, stable returns, while a trader will have to spend a lot of time to come up with trading systems to trade. Even then, there is a lot of work left for traders, whereas a long term investor might relax and just wait for his or her account increase in value.
What Types Of Trading Are There?
Trading has developed multiple forms over time and now retail traders have more options to choose from than what might have been the case some 15-20 years back. Let’s explore these options in a bit more detail.
Also called micro-trading, this type of trading focuses on earning small profits on a regular basis. Such trades usually last for minutes at best. The strategy of scalping trading is all about earning profits from small changes in price. Traders who practice this strategy can place 10 to a hundred trades in just one day.
Scalping trading requires a lot of experience and understanding of the market and, therefore, only experts should do it. Besides, it’s nearly an impossible trading form for retail traders, since it requires very quick connections, low transaction fees, and talent that is beyond the scope of most traders.
As the name suggests, day trading focuses on buying or selling in one day. Traders who practice this strategy do not hold positions until the next day. In day trading, leverage is usually used to maximize the returns traders get from small price changes.
Even though many believe that day trading can make you rich fast and easy, this is not entirely true. Day trading still holds a high percentage of risk just like any other trading activity. This type of trading can certainly involve financial losses, especially for newcomers who haven’t learned the market yet.
Momentum trading is when a trader finds a stock that is about to break out, or has broken out, and takes advantage of the momentum. The focus is to use this opportunity while the security is moving up or down and in high volume.
There is also a typical time frame when traders have high chances to practice momentum trading, and experienced players in the financial market can usually predict it with some success.
- Swing Trading
Swing trading focuses on short-term trends that last up to a few weeks at most. Traders that choose this strategy make use of their technical analysis skills to find stocks with short-term potential. A swing trader looks for price patterns and trends rather than the fundamental value of the stock.
Swing trading is actually a recommended way for newcomers to enter the market, especially for those who are not looking to do this full-time. Once you find your strategy, it might take you as little as 15 minutes a day!
Position trading is a strategy that is applied for longer periods of time – for weeks or even months. As such, it could be said to be a version of Swing Trading with a longer holding period. Traders using this technique want to anticipate how the current short-term to medium- term trend will behave.
This strategy comes with more freedom for traders that are not frequently in the game, and still allow for great profits. Position trading could be said to be the opposite strategy of day trading
- Algorithmic Trading
Algorithmic trading is a form of trading where you code your own trading strategies, and let the computer execute the strategies for you.
Some of the advantages of algorithmic trading are that you can be trading a range of markets and strategies at the same time, enabling better risk management and higher returns.
The Different Types of Investing Vehicles
Investing also comes in different forms, so there are multiple options if you are interested in making investments. Here we have listed a few of them for you.
Shares are growth investments that are used to increase the value of the main investment in the long-term. When you own shares, you usually also receive dividends.
The main risk with shares is that over time, the value may drop and you may end up having paid more for the stock than it is worth when you sell it.
Long-term investors, however, are comfortable with the ups and downs of the market. They know that the long term bullish nature of the equity markets will provide them with good returns in the long run.
For new investors, it is important to understand that investing in stocks is probably one of the riskiest investment forms if your portfolio is made up of only one stock. To lower the risk to acceptable levels, you should buy stocks in different companies and market sectors.
With a good portfolio of stocks, you can certainly make good returns without risking too much!
Also a growth investment, property investment is probably one of the most known types of investments out there. Property investments also come with a risk, but they can represent a great investment over time. The property can be bought directly, but you can also invest through a property investment fund.
Fixed interest is a defensive investment that comes with low risk and also with low return. Bonds are probably the best-known investments of this kind. Basically, companies or governments borrow a sum of money from investors and pay an additional rate of interest. Bonds can also be sold pretty quickly since the bond markets, at least for government bonds, tend to be very liquid.
Placing wealth in cash maybe is not a true investment, but bank accounts, term deposits or savings accounts, are familiar types of investments for the majority of people.
Cash investments generally do not give the opportunity for capital growth, but they do offer you some regular income to compensate for the inflation. With a low potential return, cash investments are the right choice for reducing risk when handling an investment portfolio.
Also, cash investment is a good choice for protecting wealth, provided that the interest earned is high enough to cover the inflation-induced loss of purchasing power.
How to Choose Between Trading and Investing?
Choosing between the two financial tools may not be an obvious choice, especially if you are just beginning to invest in the financial market. While you can choose multiple types of investments to get you started, the best way to gain appropriate exposure is to find an answer to the following questions first:
- Do long term or short term holding periods resonate better with me?
- Do I enjoy making active trading decisions all the time, or do I want to invest and make changes to my portfolio maybe once a year?
- How much time do I have for this in my life?
If you feel you are focused on short-term action, learn more in the trading domain. Find a mentor or do more research online and in your local field. If, on the contrary, you feel a long-term strategy is more suitable for your goals, then you should choose to learn more about investing. Either way, you need someone to teach you the first steps and show you around the financial market. Trading NEVER is a quick way of achieving results, but with some experience, you will have the chance of making good money.
Your success is never guaranteed, but you will raise the odds of becoming a consistent winner if you start off with an objective list, a budget, and a very clear image of what you need and what you expect from the market right now. This way, you can minimize the risks and choose the right path for you as an investor or trader.
If you enjoyed this article you might also like our other articles answering common questions traders have!