The most common ways to make money in stocks are trading and investing. But what’s the difference between these activities?
Investment periods
Investors don’t seek short-term gains; they have a long-term investment horizon (at least one year). The most patient investors even wait for 20–30 years to get their profits. At the same time, they plan to profit not only from the long-run asset growth but also from the regular dividends and coupon payments.
The main purpose of traders is to make a quick profit. To that end, they try to buy assets low and sell high in the shortest time possible. In the stock market, traders are called speculators because they profit from volatility (i.e., the difference between a bid price and an ask price). In this, the interval between the moment of purchase and sale can range from several minutes to several weeks.
Choice of strategy
Before investing in a specific asset, investors thoroughly study the history of the eminent, monitor how long and how often it pays dividends, and check the reliability of this company. Smart investors buy assets only from stable and well-established companies. Investors don’t worry about short-term fluctuations, as they’re focused on making long-term profits.
When buying or selling stocks, traders rely on multiple time frame analyses, consider the dynamics of price changes, and try to identify patterns in order to predict future price movements. Experienced traders also take into account the global economic situation and corporate actions, as these factors often affect price stock volatility. This skill allows them to minimize the risks (which are extremely high in trading).
Possible risks
Investing is considered safer than trading since stock markets tend to go up in the long run. If you buy the most reliable stocks, you can rest assured that their price will increase year by year. Speculative trading always involves high risk. Even one ill-timed or wrong decision can lead to huge losses.
Personal qualities
Smart investors seek to provide a more prosperous future and a great passive income for themselves and their families. To achieve this, they create a long-term investment plan, stick to it carefully and keep records of their income and expenditure in order to raise initial investment capital. After that, they invest all their savings in the business. Starting with a small amount, many motivated and dedicated investors turn it into huge capital.
Most traders are professional employees who trade on behalf of and at the expense of the employers. They work at banks, pension funds, investment companies, etc. As a reward, they receive a percentage of the profits. If a trader acts on his own behalf, he takes full responsibility for the result.
In both cases, speculative stock trading requires instant reaction, quick and correct decision making, and high-stress tolerance.
Investing vs trading: who makes more money?
There is no clear answer to this question. Some believe that experienced and successful traders can get a profit of 1000%, while others think that long-term investment is a much better option.
You should make your choice based on your age, material capacity, and character features. Each investor can become a trader and vice versa. You can even be both if you want.
The main thing is to know investing vs trading basic safety rules, equally important for the investors and the traders:
- Divide your money among different types of assets. Even if one of them losses value, others will probably stay afloat.
- Stay calm in any situation.
- Don’t be greedy and don’t try to earn all the money in the world. Chasing big profits, you can lose everything.
- Follow stop-loss and stay away from momentum trades.