With so much money on the line when participating in the financial markets, it’s helpful for retail consumers to know the differences – and the relationships between trading and investing.
Forex market trading isn't the same as stock market investing. In fact, there’s a sizable difference between the two actions, along with a few similarities that may cause investors to confuse the issue and wind up putting the trading and investing in the same category.
This is an important lesson. Trading is really short term betting with the chance of quick gains, especially if you utilise leverage. Investing is long term.
With investing, the individual is laying out a long-term plan to meet specific financial goals over an expanded period of time, usually five years or more. Investors may build an investment strategy for a variety of “big ticket” lifestyle reasons, like:
Saving for university
Buying a house
Building wealth for retirement, or to save enough money to retire early
Start their own “ business.
Trading executions happen all the time, and it’s not uncommon for higher-end investors or day traders to execute dozens of trades in a single market session. Traders try to capitalize on short-term profit opportunities and stock trades can be made with long-term investment goals in mind.
For example, an investor may buy an income stock where the underlying company pays out a solid dividend that provides that investor extra income over decades of time. That extra income could come in handy during retirement, when many retirees live on a fixed income and need all the cash they can get.
Or, a stock may be purchased as a foundational piece of a portfolio investment campaign, as the underlying company has the potential to earn profits over the long haul, thus adding continuing value to the investor’s portfolio.
In most instances, however, forex/CFD trading is trying to capitalize on short-term market conditions, usually to pick up an asset that's undervalued and flip it for a quick profit or during an earnings report or specific fundamental event. Eg, Russian embargo's causes crude oil to spike.
Categories of Traders
Style and strategy do matter to traders, and that leads to traders being classified in different categories:
Scalp traders don’t hold a stock position for long. They’re usually in and out of a stock in a matter of minutes, if not sooner. They close out all of their positions by the end of the trading day.
Day traders try to move in and out of stock market positions on a daily basis. They typically sell out all their portfolio position at the end of each trading day.
Swing traders holds a trading position for days or even weeks before selling.
Position traders edges into long-term investment territory more than any other trader category. Usually, they will hold a stock position for months or even years.
Same goal different risks
As explained investing and trading are two very different methods of attempting to profit in the financial markets however both investors and traders seek profits through market participation. In general, investors seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter timeframe, taking smaller, more frequent profits.
"Higher risk, potentially faster profits."
Investing takes a long-term approach to the markets and often applies to such purposes as pensions. Banks, mutual funds, bonds, pension funds in general are looking at long term low risk growth over a sustained period.
Private investors can manage their personal portfolio’s or use Portfolio Management, who will invest in a basket of assets and can hold stocks, bonds, cash ,property and more aiming to meet the long-term financial objectives and risk tolerance of a client, a company, or an institution.
Investors often enhance their profits through compounding or reinvesting any profits and dividends into additional shares of stock.
Investments often are held for a period of years, or even decades, taking advantage of perks like interest, dividends, and stock splits along the way. While markets unavoidably fluctuate, investors will "ride out" the downtrends with the expectation that prices will rebound, and any losses eventually will be recovered. Investors typically are more concerned with market fundamentals, such as price-to-earnings ratios and management forecasts as well as long term geopolitical developments.
Trading involves short-term strategies to maximize returns daily, monthly, or quarterly.
Investors are more likely to ride out short-term losses, while traders will attempt to make transactions that can help them profit quickly from fluctuating markets.
Trading involves more frequent transactions, such as the buying and selling of stocks, commodities, currency pairs, or other instruments. The goal is to generate returns that outperform buy-and-hold investing. While investors may be content with annual returns of 10% to 15%, traders might seek a 10% plus return each month. Trading profits are generated by buying at a lower price and selling at a higher price within a relatively short period of time. The reverse also is true: trading profits can be made by selling at a higher price and buying to cover at a lower price (known as "selling short") to profit in falling markets.
Traders seek to make profits within a specified time frame with the addition of leverage. Traders often employ technical analysis and there are an infinite number of algorithms developed almost daily. In general traders fall into these types: -
To maximise gains and reduce losses, traders typically turn to fundamental, technical and sentiment analysis. While fundamental analysis tells traders about intrinsic market values, technical analysis relies on past performance of a financial instrument.
Therefore, trading is riskier than traditional long-term investment, however it has become very popular over the past decades with the advent of the internet and fast accurate information and instant capital transactions.
Whichever way you choose to speculate the markets, an understanding of technical, fundamental, and sentimental trends will assist, as well as an eye on the geopolitical landscape.
In terms of Forex, stocks, Indices, commodities etc. a knowledge of how the markets react helps both an investor and trader make informed decisions.
There a numerous publications and websites dedicated to the markets, with analysts’ opinions, technical assessment and fundamental news that can assist.
Conclusion, Risk Parameters Differ Greatly
Risk plays a big role in both trading and investing, but once again, timing shifts that risk ratio around when you’re trading and when you’re investing.
Trading presents some significant short-term risks for market buyers and sellers. When you’re trading to earn a short-term profit, the risk of loss is greater, as large sums of cash can be squandered if an asset slides in value shortly after it’s purchased.
Investors have time to ride those risk fluctuations out, a short-term trader may have lost so much money on the transaction, he or she may not have enough cash leftover to leverage other stock market profit opportunities to cover the original trading loss.