Investing and trading are ways to grow money by buying and selling assets like stocks, bonds, and real estate.
These terms are often used interchangeably, though the approaches they refer to can be quite different in how they work, the mindsets involved, and the methods used.
Learn the key differences below.
Mindset: Playing the long game vs. seeking quick profits
Investing
Investors typically aim for long-term goals like setting up a comfortable retirement, buying a house, or supporting their children’s education.
Because of this, they’re usually looking for steady growth and are willing to wait for years and even decades before seeing acceptable returns on their investments.
Since not all investments are created equal, it is best that an investor identifies the best long-term investments to match their long-term goals.
Trading
Traders aim to make quick profits from short-term price changes. They tend to buy and sell assets within a few minutes, hours, days, or weeks.
People are drawn to trading mainly because of the prospect of “beating the market” or gaining higher returns than the market average or a certain benchmark.
Method: Looking at the bigger picture vs. monitoring market movements
Investing
As an investor, you’ll trust that the value of your assets will rise over time and so you’re not focused on daily market ups and downs.
To assess growth potential, investors typically use fundamental analysis. This involves looking at the overall health and prospects of a company or investment to get a better sense of how it may perform in the long run.
Investors tend to have a passive strategy and hold investments for a long time. Instead of making quick and frequent moves, they’ll add to their investments at a slower but more regular pace so they can gradually build their portfolio.
Trading
Traders are more focused on factors that may affect financial markets in the short term. They often use technical analysis, which involves studying charts and past price movements to possibly predict future trends.
They also follow news that can sway investor sentiment and cause price fluctuations, like the release of earnings reports and changes in economic data.
If the market moves against them, they must react quickly or take precautionary measures to limit their losses. This means traders must monitor the markets closely so they can act fast.
Risk and reward: Slow and steady vs. high stakes
Investing
Investing tends to be less risky than trading. Since investors generally think long-term, they may prioritize stable, well-established companies and investments that offer slow and steady growth.
These relatively safer options are less likely to see big swings in value, and so they may have a lower potential to provide significant returns, especially in the short-term.
To balance risk and reward, investors can diversify and choose the right mix of assets for their needs. However, doing so doesn’t make them completely immune to risks.
There is still a possibility of selling at a loss because of things such as market changes, unexpected events, and emotional investing.
Trading
Trading can be riskier since it typically involves putting money in assets that are more volatile, like stocks that are traded frequently and in large volumes.
Since traders need to make quick decisions, there’s an increased possibility of facing losses from poorly timed transactions.
The fast-paced nature of trading also means people who do it may be more prone to making impulsive moves driven by emotions instead of data.
Sometimes, huge public interest in an asset is fueled largely by speculation. Speculative trading can be extremely risky since there's a chance for the “hype” to die down, sending prices crashing before a trader can sell.
However, if things go well and the timing is right, traders may earn higher amounts and turn profits faster than investors.
Which is right for you?
A popular investing belief says, “time in the market beats timing the market.” It basically favors long-term investing (time in the market) over short-term trading (timing the market).
On the other hand, some say that an active short-term strategy is better than a passive one when it comes to building wealth.
One approach may not be necessarily better than the other, since investors and traders tend to adopt different mindsets and have unique objectives.
The decision to invest or trade should ultimately depend on what suits your situation. It’s best to consider your financial goals, attitude toward risk, knowledge level, and how much time, effort, and money you can comfortably put in.
