Investing vs Trading: Which Is Better For You?
Investing vs Trading: Which Strategy Suits You Best?
Let me picture it out for you. Think of investors and traders as two runners who sign up to run for a race. One is running a marathon adopting a consistent and comfortable style all the way to the finish line. Plus, with a low risk of injury along the way. The other one is running a sprint changing their pace periodically in the race from bursting into sprinting and maybe sometimes walking. Their common goal is to reach the finish line but they behave differently in the process of achieving it.
Understanding An Investor’s Profile
Let’s talk about our marathon runner first. Investing comes hand in hand with a long-term buy-and-hold strategy. It is actually the process of building long-term wealth rather than achieving short-term gains. If you are into investing you should probably know that investors hold assets for years, or even decades, aiming to generate substantial profits from the rise of the asset prices and any income generated from the assets over time. So, keep in mind that short-term market fluctuations are insignificant in the long-running investing approach.
Your investing time horizon as an investor will depend on your financial objective. If, for example, your goal is to achieve self-retirement through investing, your time horizon could be 20 years or more. Yet the higher your time horizon, the more time you have to ride out market volatility. A more short-time investor, on the other hand, needs to be more conservative with their choices otherwise they may risk not meeting their financial goals. Investing is an art and it takes a while to develop. It involves comparatively lower risk and lower returns in the short run but might deliver higher returns by compounding interests and dividends if held for a longer period of time.
⚠️ Being an investor is synonymous with being also comfortable with the fact that financial markets tend to rise and fall in the short term. So be prepared to experience periods of underperformance with the expectation that asset prices will eventually rise and they will balance out any potential short-term loss.
Putting A Trader’s Profile Under the Microscope
But what about our sprint runners? Compared to investing, trading is a more active, short-term-focused strategy. Trading involves buying and selling stocks or other securities in a short period of time with the goal of making quick profits. While investors typically measure their time horizon in years, traders think in terms of weeks, days, or even minutes.
Unlike investors, traders look to profit from both rising and falling asset prices. They look at the price movement of assets in the market focusing on which direction the asset’s price is likely to head in next and try to make profits from these price movements. To put it simply, trading is the skill of timing the market whereas investing is an art of creating wealth by compounding interest and dividend over the years by holding quality stocks in the market.
I’m sure you already know that both trading and investing imply risk on your capital. However, trading involves higher risk and higher potential returns as the price might go high or low in a short while. This is why as a trader you need to be more time committed compared to investors. Unlike investors who mainly make ‘set it and forget it’ type of investments, a trader needs to be constantly monitoring market developments.
Which One Suits You Best?
Going back to our story, you are the one to decide if you want to be a marathon or a sprint runner. Trading offers the excitement of quick changes and big surprises. Yet, it comes with a greater risk! On the contrary, investing usually means smaller short-term wins, but also fewer severe losses. It’s a completely different mentality.
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