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Trading and Investing: What is the difference?

Trading and Investing: What is the difference?

What is trading?

Trading is a fundamental economic concept that involves buying and selling assets. These can be goods and services, where the buyer pays the compensation to the seller. In other cases, the transaction can involve the exchange of goods and services between the trading parties.

In the context of the financial markets, the assets being traded are called financial instruments. These can be stocks, bonds, currency, pairs on the Forex market, option, futures, margin products, cryptocurrency and others. 
The term trading is commonly used to refer to short-term trading, where traders actively enter and exit positions over relatively short time frames. However, this is a slightly misleading assumption. In fact, trading may refer to a wide range of different strategies, such as day trading, swing trading, trend trading, and many others. 


What is investing?

Investing is allocating resources (such as capital) with the expectation of generating a profit. This can include using money to fund and kickstart a business or buying land with the goal of reselling it later at a higher price. In the financial markets, this typically involves investing in financial instruments with the hopes of selling them later at a higher price.

The expectation of a return is core to the concept of investment (this is also known as ROI). As opposed to trading, investing typically takes a longer-term approach to wealth accrual. The goal of an investor is to build wealth over a long period of time (years, or even decades). There are plenty of ways to do that, but investors will typically use fundamental factors to find potentially good investment opportunities.

Due to the long-term nature of their approach, investors usually don’t concern themselves with short-term price fluctuations. As such, they will typically stay relatively passive, without worrying too much about short-term losses.


Trading vs. investing – what’s the difference?

Both traders and investors seek to generate profits in the financial markets. Their methods to achieve this goal, however, are quite different.

Generally, investors seek to generate a return over a longer period of time – think years or even decades. Since investors have a larger time horizon, their targeted returns for each investment tend to be larger as well. 

Traders, on the other hand, try to take advantage of the market volatility. They enter and exit positions more frequently, and may seek smaller returns with each trade (since they’re often entering multiple trades).

Which one is better? Which one is more suitable for you? That’s for you to decide. You can start educating yourself about the markets, and then learn by doing. Over time, you’ll be able to determine which one suits better your financial goals, personality, and trading profile.


What drives the financial markets?

The price of an asset is simply determined by the balance of supply and demand. In other words, it’s decided by the buyers and sellers. Where supply meets demand, there’s a market. But what else can drive the value of a financial asset?

There can be fundamental factors, such as the state of the economy. In addition, there can be technical factors like the market cap of a cryptocurrency. Also, there may be other factors to consider, such as market sentiment or recent news.

However, these are just that – factors to consider. What really determines the price of an asset in a given moment is simply the balance of supply and demand.


What is a market trend?

Generally, there are two main types of market trends: bull and bear market. A bull market consists of a sustained uptrend, where prices are continually going up. A bear market consists of a sustained downtrend, where prices are continually going down. In addition, we can also identify consolidating, or “sideways” markets, where there isn’t a clear directional trend.

It’s worth noting that a market trend doesn’t mean that the price is always going in the direction of the trend. A prolonged bull market will have smaller bear trends contained with it, and vice versa. This is simply just the nature of market trends. It’s a matter of perspective as it all depends on the time frame you are looking at. Market trends on higher time frames will always have more significance than market trends on lower time frames.

A peculiar thing about market trends is that they can only be determined with absolute certainty in hindsight. You may have heard about the concept of hindsight bias, which refers to the tendency of people to convince themselves that they accurately predicted an event before it happened. As you’d imagine, hindsight bias can have a significant impact on the process of identifying market trends and making trading decisions.

Credit: Binance