Written 8 Dec. 2021 at 7:00 a.m
The terms “trade” and “investment” are used as if they were interchangeable. It is true that they both aim to achieve financial gain. But are they really the same?
Shares in many companies have risen sharply during the pandemic. This market volatility, along with the prospect of making a lot of money, has highlighted the differences between trading and investing.
First point: the difference between trading and investing is not just what you buy or sell. Investors and traders tend to buy and sell the same assets (stocks, stocks, currencies, commodities). The real question is how and when you buy and sell.
Basic Difference #1: Time
One of the main differences is in the holding period of the asset. Traders profit in both bull and bear markets. They tend to “enter and exit” positions (that’s the fancy way of saying “buy and sell”) over a shorter period of time. That is, they are likely to make smaller but more frequent gains or losses.
As mentioned above, traders often like volatile markets because the more movement there is, the more likely it is to drive the market up (or down).
In contrast, investors’ longer horizons cause them to focus on years or even decades rather than traders’ weeks, days, hours or minutes.
Traders tend to have their eyes glued to their screens, constantly monitoring price movements. Investors do not necessarily follow short-term price movements and may not know the value of their positions for long periods of time.
Basic difference #2: the strategy
Traders may have a strategy, but it will likely be tied to short-term price movements. It is generally unrelated to the intrinsic value of the investment itself or the personal goals of the traders.
On the investor side, it is often the opposite. Most of them, because they have a long-term view, will study factors such as the future growth potential of a company. This is just one example of how they decide which stocks to buy and hold.
Investors are also more likely to follow a personal plan. What is the investment for? Is it used to pay for a house in a few years? Or to secure his retirement? If one or the other of these scenarios exists, the investor can e.g. establish a plan according to when he is likely to need cash. And this will affect his investment choices.
Basic Difference #3: Risk
Whether you have the profile of a trader or an investor, you face an inherent risk. You may lose all or part of your money.
But the risks are different. An investor who buys and holds positions generally makes fewer decisions and trades less than a trader who frequently “steps in and out”.
Thus, if the investor’s gains are less spectacular than the trader’s over certain periods, it is also possible that his losses are also smaller.
Historical market data shows that the longer you hold a company’s stock, the less likely you are to lose. In comparison, traders do not have this guarantee because they hold their assets for a short period of time.