Should You Trade or Invest?

Trading and investing both have different strategies if trying to profit from the financial markets. When it comes to trading, you are looking to capitalize on short-term market fluctuations in an asset’s price. Trades taken tend to be closed within a much shorter time frame, sometimes on the same day, depending on your method. There are varied types of trading styles which I will go over later within this piece. Investing is more the case of buying and holding a security patiently over an extended period.

Trading

If you are trading different skill sets and methods are involved that require much greater psychological strength, day-in-day-out. It requires activity to be of higher frequency typically in comparison to investing. Traders tend to be seeking much larger returns, trying to outperform the aspect of buying and holding securities over a long time frame. Trading will require you to buy an asset at a lower price and sell it at a higher price. It will also work in reverse, selling at a higher price and the buying at a lower price when closing out the position.

Many retail traders will be looking to make excessive monthly percentage gains with their trading portfolio. Being reserved with this estimate, they may try to make around 10% each month. In a more significant comparison, a long-term investor would perhaps be happy with return of about 10-20% over the year. One of the critical reasons for this is traders tend to have smaller capital at hand, which is something that can be very problematic for their chances of success.

Types of Trader

There are different types of traders, and they will all have their strategy to generate money from the markets. It will come down to what works best for them, around their current working life, family commitments, availability and so on.

Scalpers are a type of trader that holds a security for a concise period, typically for a few seconds to a few minutes at the most. The goal usually is to try and gain minimal amounts of pips as frequently as they can during the busiest times of the day.

Day traders will often close all trades before the end of the trading day, so not to hold open positions overnight.

Swing traders like to hold their positions for several days at a time. These types of traders will not monitor their charts throughout the day. They will do required analysis each evening or during quiet periods to make their upcoming trading decisions

Position traders are more longer-term term, as they will have trades that last for several weeks, months, or even years. The motives for their trades will not be influenced by fundamental themes.

Investing

In terms of investing, participants will be seeking greater returns over an extended period through buying and holding. These can consist of placing positions which will remain open for months, and often years. These are buy-and-hold trades, as opposed to quick, buy-and-sell-trades. As a longer-term player within the market, it will require greater patience. Investors need to allow their assets to mature to reap the benefits of their investments.

The art is creating wealth by fully leveraging compounding interest, in addition to the dividends over the years. It, of course, is subject to holding the right quality assets. For example, if you are choosing stocks, then fundamentals and growth prospects around the company need to be considered. A company paying a decent dividend rate is also a vital part of generating greater wealth over a more extended period.

Risk

There are risks in both trading and investing in whatever capital you have involved. Typically, trading comparatively does involve much greater risk but still enjoys higher potential returns. Investing is more somewhat of an art; it does take a while to develop. It will comparatively have lower risk and lower profits in a short run versus trading, however, it may deliver higher returns by compounding interests and dividends if held for a more extended period.

In Summary

If you can trade intelligently and more importantly control your emotions during trades, you can have a good chance of success. If you cannot, then you’ll almost certainly fail.
In general, investors don’t spend all day monitoring the screens and portfolio. Research may be done on the weekend or after work in their spare time, and then check on any progress occasionally.

Investors typically hold their investments for longer periods in comparison to traders; the short-term fluctuations shouldn’t have a significant impact on their long-term goals.

Traders typically will dedicate a more considerable amount of time and attention to monitoring their trades/investments. Their goal is to take advantage of small price movements; a trader may have to sell quickly and on short notice. For development, a trader will also need to spend time keeping records and carefully watching their trade performance, in addition to costs such as those incurred with their broker.

Featured image courtesy of Shutterstock.

Author:
Ken has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.