A well-known quote says, “In investing, always remember that Rome was not built in a day; in trading, always remember that Hiroshima and Nagasaki were destroyed in a day.” Trading and investing are just two sides of the same coin.
In the end, trading and investing both aim to achieve the same goal: profit. Interestingly, the approaches towards this objective are different. Some traders may argue it is more profitable to trade, while some investors may say investing can yield more significant gains.
There is no scientific answer to such a question as numerous factors dictate the profit potential, such as the skill, experience, risk appetite of the trader or investor, and the chosen instrument. Nonetheless, there are some distinct discrepancies between trading and investing.
|Vision||Short-term (minutes, days, weeks, months)||Long-term (years, decades)|
|Ability to profit off both appreciating and depreciating markets||Yes||You can only buy (and not sell) some investments if investing in the real asset (cryptocurrencies, precious metals, etc.)|
|Time involvement||Active, frequent transactions||Passive, rare transactions|
|Capital requirement||Usually leveraged||Usually requires the full investment|
|Analysis preference||Mostly technical analysis||Mostly fundamental analysis|
Investing is seen as a means to build sustainable wealth gradually over the long haul, while trading is about ‘quick cash’ in the short term. An investor should always have a horizon spanning at least several years and longer.
Short-term price fluctuations are usually insignificant due to this vision. Even if an investment is technically losing value, the investor can continue holding and even use techniques such as dollar-cost averaging if they have firm beliefs in its potential value.
In contrast, a trader lives in the moment where short-term fluctuations in price matter more. If a position is losing value, it is unlikely for them to hold it for extended periods. Due to leverage, they are often forced to liquidate the trades immediately.
Ability to profit off both appreciating and depreciating markets
All tradable instruments allow one to buy and sell a specific market without owning the underlying asset (known as derivatives). For example, let’s look at Bitcoin. You can trade this security as a derivative through many brokers or own (buy) the actual coin from an exchange (at the prospect of gaining from its appreciation).
As a derivative, you can open a sell position without having bought it initially, thus potentially gaining from its depreciation. As an investment, in the initial stage, you can only buy Bitcoin and potentially profit only from its appreciation. When you’re selling (which may be in profit or loss), it is not the same as a sell position in trading as one is dealing with the real asset rather than a derivative.
While trading and investing require specialized knowledge and experience, you have to commit more time to the former than you do with the latter. A trader needs to be up-to-date with everything happening in their chosen markets on a daily, hourly, to even a minute basis (in some cases).
This attribute means a trader needs to be sharp, reactive, and have the ability to make quick decisions. As an investor, there is time involved before the investment in terms of the research and risk assessment.
However, once they’ve completed the investment, an investor typically spends far less time actively monitoring it because of having a far-reaching vision. Despite any fluctuations in price, to an investor, these are insignificant. As a trader, any price changes are significant to their positions.
A trader and an investor can have the same amount of capital, though their approaches will differ. Most tradeable products operate on leverage, while invested ones typically require the total value of the investment.
Leverage means a trader does not need to put up the full value of the position or investment, which is an advantage as there is less financial commitment. However, as the margin is a double-edged sword, a trader’s losses can be amplified in a short period, making it riskier.
It is not necessarily that investing is less risky. However, if committing the full value of the investment, your losses aren’t magnified in a quick span (unless you decide to sell) because of having long-term foresight.
A famous quote primarily associated with stocks states, “Time in the market beats timing the market.” This saying can apply to many other financial markets. Trading involves most of one’s emphasis on technical analysis (fundamentals do matter for long-term trading styles), which focuses more on finding the best possible entry.
The timing here is crucial because as the hold times are shorter, entering too late usually equates to a loss or a position yielding fewer profits than desired. With investing, time is the most critical factor.
Investors look at the intrinsic value of a potential investment, which requires more fundamental analysis.
Although technical analysis is still necessary for gaining an entry, it doesn’t have to be as precise with trading. Even when an investment is in the red, this is irrelevant to the investor in that current moment.
Is any method better than another?
Ultimately, circumstances dictate whether one chooses to trade or invest. Although leverage has its disadvantages, some tradable instruments like forex and cryptocurrencies are better for traders because of their high volatility.
Traders thrive off markets that can move great enough a distance to make the gains worthwhile. The disadvantage of trading is that it’s time-consuming, and there is always a risk of over-leveraging at any time.
Someone may decide instead to choose investing as it’s far less time-consuming and leverage is mostly non-existent. Investors can take advantage of highly volatile instruments like stocks, indices, and cryptocurrencies through buying or selling and holding for an extended period.
They may feel more comfortable committing significant disposal income at defined periods than at a time (known as dollar-cost averaging) through a ‘set and forget’ approach without much further time involvement and active monitoring.
In some instruments, such as forex or futures, due to its dynamic structure and higher volatility, one is better off trading than investing.
Conversely, if we’re looking at a brand-new cryptocurrency or stock, it may be better to invest in it as a ‘bet’ that it will appreciate in the next year or two or longer. Overall, trading is more for the impatient, while investing is more for the patient.
One is not necessarily better than the other as some financial markets are ideal for investing while some are perfect for trading.