Do you know the difference between Trading and Investing? I will give my answer in this post.
Summary
What is Trading?
What is Investing?
The major differences
Which must I choose, trading or investing?
Conclusions
What is Trading?
Trading is a short-term or medium-term investing process on financial assets in the market. Examples of trading are buying stocks, commodities, and currencies and selling them after hours, days or weeks.
So, trading online is dynamic; it can produce good profits quickly, but it’s also risky.
Traders are concerned about technical analysis (price chart trends, graphic patterns, technical indicators like moving averages, etc.) and price action.
I suggest this classification of trading activity based on its duration over time:
- Fast trading (often called “Scalping”): you buy and sell an asset within one hour.
- Short-term trading (often called “Intraday trading”): you buy and sell a purchase within one day.
- Medium-term trading: you buy and sell financial instruments within a couple of weeks.
- Long-term trading: you buy and sell a purchase within a couple of months.
Beyond this monthly time horizon, we need to talk about investing.
What is Investing?
Investing is a long-term approach where the goal is to build wealth over time (months/years) using investing schemes such as hedge funds and mutual funds, buying and selling a portfolio of stocks, bonds, and commodities.
This financial process is less risky than trading and the investor is not worried about a downtrend because he has the expectancy that the prices will soar over years (especially stocks).
Investors are more concerned than traders about the market fundamentals (Fundamental analysis, looking at all available information about an asset).
The major differences
It’s clear that we have three great differences:
- the time horizon (short for trading and long for investing);
- the technical approach (technical analysis for trading and fundamental analysis for investing);
- the risk (both involve risk, but trading is riskier than investing).
Trading and investing are very different!
Which must I choose, Trading or Investing?
My answer is both of them!
I disagree with the logic of “Trading vs. Investing”; I prefer the logic of “Trading and Investing”.
Based on my personal experience, I suggest this primary choice: if my capital is equal to 100, I can allocate 80 or 90 to investing and 10 or 20 to trading.
I will manage the capital allocated to investing with a portfolio logic (like the “All seasons portfolio” of Ray Dalio, for example), and I will manage the capital assigned to trading online trading stocks, CFDs, futures, financial options, etc.
This is my philosophy, and this way I will gradually build my wealth.
Conclusions
Trading and investing have many great differences:
- the time horizon (short for trading and long for investing);
- the risk (trading is riskier than investing);
- the technical approach (technical analysis for trading and fundamental analysis for investing).
However, to build your wealth, you can choose both of them, allocating to each an appropriate percentual of your capital.
A sincere wish of good work to all!
Written by F. GRAMOLA (*).
(*) Member of S.I.A.T., the Italian Society of Technical Analysis (member society of I.F.T.A. – International Federation of Technical Analysts).
Warning
We merely cite our personal opinions for educational purposes only.
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Investing and trading are risky. Don't invest or trade money that you cannot afford to lose.
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