People often talk about trading and investing as if they're the same thing, but they're really quite different. In this post, I'll outline the differences between the two, which will hopefully help you decide whether your personality and current lifestyle are best suited to becoming:
Traders aim to earn high returns on their money by buying and selling stocks, foreign exchange, commodities or derivatives. They concentrate on daily market noise (what's going on in the news each day) and look for buying and selling signals through technical analysis (looking at price charts for patterns).
Traders can make money when stocks are going up or down because they can sell short by selling stocks they don’t own, or have borrowed from their broker. Below is an example of a 'short sale':
One week later, Apple’s stock price goes down after some disappointing sales figures are released for the new iPhone. Jimmy sees an opportunity! He buys the 100 shares back from someone else at the lower share price and returns them to his broker.
Jimmy makes a profit because he sold the shares earlier when they were at a higher price and bought them back one week later at a lower price. If Apples’ share price went up (rather than down), Jimmy would lose money because he would have to buy the shares back at a higher share price so he could pay back his broker.
Short selling is just one of the many trading strategies that you can use if you decide to become a trader.
Investors focus more on the long-term. They tend not to focus on daily market noise and look for quality stocks, bonds, or mutual funds to invest in for the long-term. They would rather own shares in really good companies because they think those companies will continue to grow and prosper for many years, which means higher share prices over time.
Investors also hold shares (or mutual funds made up of lots of different shares) so they can earn dividends each year, which are like regular payouts they receive as a reward from the companies they invest in.
Which one are you?
Both trading and investing have the potential to earn you high investment returns over time. I would say investing is easier to learn, less stressful, and needs a lot less day to day maintenance than trading. You can read Stop Saving Start Investing if investing is something you wish to consider.
On the other hand, if you learn how to master trading you can potentially do very well financially. In fact, many people have learnt how to trade from home full time. But be warned: