Trading or investing

Wednesday, June 19, 2013

Trading or investing

Choose your cup of tea

Trading or investing are two key financial tools used to generate a profit by utilizing money in both global and domestic financial markets. Although these terms are often kicked around as if they are identical, yet they are not. There are a few differences, but their influence can be enormous. The most widely accepted and powerful distinction between the two is the time horizon. 

Image credit: iqoncept / 123RF Stock Photo

When it comes to choosing one out of these two, you must know what each of them denotes. 

  • Investing – This is something which is aimed to build wealth slowly but surely over a long period of time by means of buying and holding of portfolio of investment instruments including stocks, bonds, mutual funds, buying gold etc. As an investor, you can increase your winnings by reinvesting or compounding profits and dividends as well into more numbers of shares of certain companies’ stocks.
Investing is usually helpful for a longer period of time, sometime even decades. Holding of funds for a longer period of time ensures facilities such as dividends, bonus, interests, stock split etc. When the financial market fluctuates, regular investors move out the downward trend expecting that the price will be bounced back, and losses if any, will be recovered gradually. They are more concerned about the fundamentals of financial market like running forecasts of different companies and price-earnings ratio. 

  • Trading – On the other hand, trading denotes frequent buying and selling of stocks, currency pairs, commodities, swaps and futures, bonds etc in order to generate significant revenue that outperform investing. While investors are satisfied with 10% to 16% profit on a yearly basis, traders seek at least 10% return on their money on a monthly basis. However, it differs from individual to individual. Traders make a profit by buying a stock or any other financial instrument at a lower price and selling that when its price gets higher. The reverse can also be done - a trader can make a profit by selling a stock or partnership or any other instrument at a high price and then buy it at a low price to cover up.
This method of trading is called as short selling. Traders often take advantage of short selling when there is a downward surge in the market. Therefore, when buy-n-hold investors have to remain under such a situation, the traders can make a profit by short selling. However, they usually set a stop loss while trading in the financial market, especially in a volatile one to limit the amount of loss, if any. They also use financial tools like stochastic oscillators and moving average to ensure high yield. 

Both traders and investors want to make a profit by utilizing their resources in the financial market. In case of investment, the financial instrument (stock or bond) is held for a longer period of time in comparison to trading. So, as it is discussed earlier, the main difference between these two is the time horizon for which the money in the form of a financial instrument is held. Nevertheless, trading is riskier than investing, though, traders can make profits and loss too in both falling and rising markets. 

About the author-

Marie has been writing since 5 years and deals with budgeting, binary option, retirement investment with

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