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The Line Between Trading VS Investing

Both trading and investing are relatively different ways of making your profit from the financial market. I have heard a huge number of people using the word interchangeably, including university graduates with finance background. Hence, I have decided to explored the specific differences in these terms.

So what’s the difference between trading and investing?

1) Time Period and Frequency

Investing typically involves building your assets over a long period of time through the “Buy and hold” strategy. By a long period of time, it would mean at least a few months to as long as a decade or more. The portfolio of an investor would not have much changes as it would be a gradual addition of their investments. I would describe investing to having a long term relationship as there is stability involved and of course, the plan is to hold your portfolio for a long period of time.

Whereas for trading, it could be as short minutes, days or weeks and can be as long as months or years, depending on the types of traders which could be segmented into four main types. The scalp trader holds their position as short as seconds to few minutes and they do not hold any positions overnight. The day trader, as the name suggests, opens and closes their position within the day. The swing trader holds their position from a few days to a few weeks. And lastly, the position trader hold their position from a few months to years.

 

2) Types of instruments

The types of instruments you invest in might differ from that of those you trade. As investors go for lower risk portfolio, they would therefore get a lower return as compared to a trader. Furthermore, since the former buys and holds the stocks, they would focus more on dividend or interest returns that they could get a regular amount back, rather than going for capital appreciation. Hence, instruments like REITs, ETFs, blue chips and bonds may suit the investor more and penny stocks, small-mid cap stocks, futures, options, forex would suit a trader more.

 

3) Strategy

Investors would rely mainly on fundamental analysis, often looking at the financial status of the company, whether are they generating revenue, or the potential revenue growth etc. You would see investors study the balance sheet and income statement to measure the value of the company or asset to determine if it is worth buying.

Sometimes, investors would also use a mixture of both fundamental and technical analysis. Since they have already done their homework and decide that the particular stock is worth buying, some would like to ensure that they get the best bargain by looking at the best time to enter the market through technical analysis, such as MACD and moving averages.

Lastly, traders often use technical analysis to find high probability trades. They rely mainly on chart patterns, how the prices behave historically and their prediction of how prices will behave in the future based on patterns.

 

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FP • September 9, 2017


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