Trading vs. Investing: What’s the Difference?
Essentially, trading and investing are considerably different; trading focuses on short-term buying and selling while investing focuses on holding on for an extended period of time. Trading and/or investing became a popular pastime during the 2010 financial crisis, however with the ongoing pandemic situation it has reached new heights.
How does it Work?
Trading and investing are two different approaches to the stock market. Trading is a way of making quick returns based on short fluctuation in the market. On the other hand, long term investors build a diverse portfolio and hold on to their assets through the ups and downs of the market.
Investing: The goal of investing is to build wealth over a period of time through buying stocks, investing in mutual funds, real estate and so on. Having a diverse investing portfolio is important as it reduces the risk mainly by diminishing the effects of volatility. Investments are held through the years, taking advantage of perks such as interest, dividends and split stocks. Despite the market fluctuating, investors will hold on expecting that prices will rebound and losses will eventually be recovered.
Trading: All about short term transactions and the goal is to generate returns that outperform the buy and hold investments. While investors are satisfied with a yearly return of 10%, traders will seek to have 10% return each month. Making a profit through trading means it’s time to milk it. By this, we imply you enter the market and buy at a low price and selling when high, this is typically done during a short period of time.
Both investing and trading can be done with a strategy in place. Going without a strategy is like going to the casino; it’s a gamble and when gambling the odds are against you. Developing your financial IQ and improving your financial literacy, are keys to help you kick-off your investing/trading journey.