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Investing vs Trading: Which Is Better For You?

Investing vs Trading: Which Strategy Suits You Best?

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Are you one of those who think investing and trading are the same thing? Well, you’re not alone. This is a common misconception since many of us have considered them, at some point, as synonyms. The truth is that investing and trading are two methods of attempting the same thing: profit in the financial markets. Yet, they pursue this goal in completely different ways.

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.

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⚠️ 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.  

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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. 

💡 Remember: One strategy is not necessarily better than the other. Both have shown signs that can be successful ways of profiting from the world’s financial markets. It all depends on your PERSONAL financial objectives, risk tolerance, understanding of a particular market or asset class, and the amount of time you’re willing to dedicate towards research and monitoring your holdings.

So in case, you want to begin your journey as an investor and you don’t know where to start, let me introduce you to Freedom24. Freedom24 is an Online Broker that gives you access to more than 40,000 equity investment products, ETFs, Bonds, Futures & Options. At the same time, it gives you access to IPOs, offering the opportunity to be the first to invest in companies that are going to enter a stock market. It is an excellent choice for long-term investors who want to make a few moves due to its special billing system and its security.

If alternatively, trading works better for you DEGIRO gets your back covered! You can trade with confidence on the Europe’s best discount broker. Join millions of other traders and access to a vast range of investment options assets, including stocks, ETFs, bonds, and more. If all that sounds promising to you, there is only one thing left to do: Create your DEGIRO account now for free and start trading!

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