Trading Or Investing, Which One Is Better For You?
People often talk about trading and investing as if they’re the same thing, but they’re really quite different. In this post, we’ll explore the differences between the two, which will help you decide whether are best suited to becoming:
- A trader,
- An investor, or
- A combination of both.
Traders aim to earn high returns on their money by buying and selling stocks, foreign exchange, commodities, cryptocurrencies, and 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.
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’:
- Jimmy thinks Apple Inc’s share price is going to drop, so he calls his broker and asks if she can lend him 100 Apple shares.
- The broker agrees to lend Jimmy the shares if he returns them to her later on.
- Jimmy then sells the shares to another trader.
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 Apple 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, rather than daily market noise. They invest in quality stocks, bonds, or mutual funds for the long-term. They would rather own stocks in good companies that will grow for many years. This means higher stock 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.
Bond investors own bonds so they can receive interest.
Are you a trader or an investor?
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:
- It takes time to become proficient at trading, and you’ll need some professional coaching to get you there.
- If you’re going to start trading it’s best to start small, with money you can afford to lose, until you build the skills to take things further.