Posted 8 Dec. 2021 at 7:00 am
The terms “trading” 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 thing?
Shares of many companies have soared 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, shares, currencies, commodities). The real question is how and when you buy and sell.
Fundamental Difference #1: Time
One of the main differences is in the holding period of the asset. Traders profit from 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 wins 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 and constantly monitor 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.
Fundamental difference n° 2: the strategy
Traders may have a strategy, but it is likely to be tied to short-term price movements. It generally has no connection to the intrinsic value of the investment itself or the traders’ personal goals.
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 business. This is just one example of how they decide which company 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 ensure his retirement? If one is in one or the other of these scenarios, for example, the investor can establish a plan according to the moment when he is likely to need liquidities. And this will influence his investment choices.
Fundamental Difference 3: Risk
Whether you have the profile of a trader or an investor, you are faced with an inherent risk. You can lose all or part of your money.
But the risks differ. An investor who buys and holds positions generally makes fewer decisions and trades less than a trader who “enters and exits” frequently.
Thus, if the gains of the investor are less spectacular than those of the trader over certain periods, it is also possible that his losses are less so as well.
Historical market data shows that the longer you hold a company’s stock, the less likely you are to make a loss. By comparison, traders do not have this guarantee because they hold their assets for a short time.