Investing Vs Trading

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Is Investing Like Gambling?

It can be, depending upon the type of investing strategy you adopt i.e. short-term trading or long-term investing.

What’s the Difference?

Trading: is about buying and selling stocks for short-term profit, with a focus on share prices.

Traders buy and sell stocks within weeks, days, even minutes, with the aim of short-term profits. They often focus on a stock’s technical factors rather than a company’s long-term prospects. Traders are concerned about which direction the stock will move next and how they can profit from that stock’s movement.

Investing: Investing is about buying stocks for long-term gains. Long-term investors buy and hold a stock for years and often hold stocks through the market’s ups and downs

Traders vs Investors

Timing is the chief difference between traders and investors, but their focus also differs significantly.

Investors will study a company’s potential for long-term growth or value, but traders often take advantage of small price movements in the market, such as when political uncertainty in a foreign country temporarily pushes down the share price of a company.

These ‘scalp traders’ might be in a position for just a few minutes before selling, ‘day traders’ focus on the trading day and ‘swing traders’ invest for days or weeks.

Which is Best?

That depends upon your investing strategy and your goals, but it is generally considered that trading is more risky and only suitable for experienced investors, even then, many experienced traders lose money. There are many factors that could affect the outcome of a trade; an unexpected piece of good or bad news or something happening in the wider market that affects the share price of the stock. Trying to second-guess what the market will do next has blindsided many experienced investors over the decades. Having said that many traders, experienced or novice, have and do make money and sometimes, if the trade hits a sweet spot, very much money indeed. Bear in mind that each trade will incur a transaction fee which, if you are trading regularly, will eat into any profits you make. But overall, trading can be more akin to gambling than well-researched long-term investing.

Long-term investors will generally undertake research into a company e.g. its fundamentals, its management team, financial situation, levels of debt, future plans and any available company reports, and investigate the market conditions for the sector in which the company operates. They then plan to hold onto the stock for years or even decades, holding firm and not selling when the market suffers setbacks because they believe in the stock they have purchased. It is by no means guaranteed that they will not lose money, but this approach can weigh the odds in their favour and they can accrue wealth in the long-term.

It is generally considered a rule of thumb that investing is a longer-term approach and considered a lesser risky to manage your wealth than trading; which is viewed as more speculative. Many people see trading portrayed in movies and think that it will be an easy way to quick riches and for a few that can be so, but most traders lose money this way. The smart way to approach investing is not to invest more money than you can afford to lose and think about investing as a long term approach to managing your wealth with a range of assets in a diversified portfolio to spread risk. Buyer beware and learn the difference between investing and trading!

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