Updated: Nov 19, 2020
Investing and trading are two very different methods of attempting to profit in the financial markets. 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, potential quicker 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: -
Position Trader: Positions are held from months to years.
Swing Trader: Positions are held from days to weeks.
Day Trader: Positions are held throughout the day only with no overnight positions.
Scalp Trader: Positions are held for seconds to minutes with no overnight positions.
Traders often choose their trading style based on factors including account size, amount of time that can be dedicated to trading, level of trading experience, personality, and risk tolerance.
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.
Insiderkk.com aims to write about potential opportunities without giving investment advice. You can either invest or trade or do both. We look at best practice services and brokers as recommendations only but whatever way, note trading or investment comes with differing degrees of risk.