There are different myths about trading and investing, and some of such myths are just far beyond the facts about them.
Investing is long-term and involves lesser risk, while trading is short-term and involves high risk. Both earn profits and face losses, but how many of them, obviously depends on their skill and patience. Regardless of that, when it comes to the accumulation ratio, traders are the ones who frequently earn much profit compared to investors (given that they make the right decisions + the market is performing accordingly)
However in some conditions, a lot of traders also lose money, while investors can continue to earn profits over time regardless of the market conditions. Trading is just like the “NY-London overlap session”; too volatile to handle.
The greatest difference between trading and investing lies in the time frame of the investment. Investors invest for a long-term and traders usually trade for a short-term.
While both can make quick profits in a short period of time, investors focus on steadily building wealth for years to come by owning an asset for more than a few months.
On the contrary, traders look at short-term price fluctuations that occur within minutes or days.
In general, trading is about making quick and frequent profits, and investing is about making long-term gains.
Difference in skills for trading and investing
Trading, like any other job, requires a certain skillset. It requires fast reflexes, analytical skills, and an understanding of price action.
While trading can be profitable on its own merits if these skills are sharpened well enough as it is mostly a job that can be learned and improved.
In contrast to trading (or having any short-term career), investing has little to do with building up a particular skill set or being able to achieve huge results in short time spans. It is more about building wealth through long term means such as saving up money, putting it into assets with a high ROI.
Most people do not have the time or willpower to sit down and monitor the markets all day. Even though short-term trading can be very profitable when done right (and with enough practice), it requires an immense amount of exertion and hard work.
On the other hand, long-term investing does not require much monitoring at all. Investors put in their money and get a return on that money without having to do anything else about it for days or even years.
Investing is a passive investment approach focused solely on the long-term. Trading, as we know, requires a lot of research, planning and execution to be successful.
The great thing about investing is that it is an infinite source of wealth; while trading can only create more money in the present.
In terms of price action, it takes much more time for prices to reach their natural bottom when investing in a particular asset than it does for traders to profit from buying/selling at the right time.
It takes around 10 years for an investor to get back the same amount of money he put in if he sells his capital gains portfolio today. On the other hand, trading can potentially create even more money in the present.
Trading is risky and carries high risk, while investing has no risk at all.
Traders can lose large amounts of money quickly by making wrong decisions, whereas investors’ capital is safe in their portfolio for years.
But on the other hand, investing can provide much greater benefits if done correctly than trading. Investors are able to see their returns grow into a greater sum from year to year with no effort at all.
And of course, there’s always a chance (even with investing), that you could lose everything. But it is an infinitesimally small chance, unlike trading.
Misunderstandings about the two terms
The terms “trading” and “investing” are often misunderstood by people. They both are considered high-risk activity. However, it is very important to understand that the two words have very different meanings.
While trading does involve risks, it can still be a long-term career for many people. Successful traders are able to see their wealth grow year after year with little effort required on their part to keep up with market trends.
On the other hand, most investors(too), end up losing money in the long run as they do not know how to monitor their portfolio and make profitable trades themselves. In fact, without proper knowledge and planning, investors are always at risk of losing money rapidly in a depressed market or asset price crash.
People often consider trading as some form of gamble, while it’s not true at all. Gambling is a controversial term, as some people refuse to call “Poker”, too, as gambling. That’s why people often compare trading with poker, and hence conclude it as a gamble. But trading is not only a game of skill, it is a game of long-term patience, which in order to gain, people have spent their whole lives. In this world of competition, Trading can be fairly called “trading” and not Gambling.
Myths and facts about stock market trading and investing
There are so many myths about the stock market that it is very important to be able to distinguish between facts and fiction regarding this activity. Most of these myths are based on the idea that there is a system that can make you rich over night.
Usually, most people who want to invest but don’t know how end up investing in unorthodox ways such as day trading or in penny stocks.
The truth is that investing just requires buying an asset with a good history of accumulating their value over time and holding onto it until it is worth more than what you bought it for.
To date, there is no secret formula or system required for investing to work. The only thing you need is an asset that will earn a decent return and hold onto it for the long term.
Although investing might appear to be a passive way of making money, if you do it properly, it can also provide many benefits as well.
Not only are investors able to enjoy the wealth that they have accumulated over the years if they maintain their investment portfolio without selling out of their assets, but they are also able to enjoy the income that their assets provide even after years of holding them in their own hands.
And this benefit can significantly increase over time as well because the more you keep earning on your investments, the more money you will have in your pocket every month. This can allow you to enjoy the things that you like to do in life on a much larger scale. As opposed to the myths, these facts show that investing is also not less than trading for gaining wealth in a long term.
Does trading have higher risks?
Are there always higher risks involved in trading? Of course, this is not a fact for all people. But for traders, who try and go against the trend most of the times, have higher risks.
Going against the trend is riskier because this is a very difficult thing to do, and most traders who try this end up losing all their money fairly quickly into the game. Also, it is to be noted that a reversal can never ever be predicted with certainty.
To be a successful trader, one needs to have a consistent data set of previous market movements and prices in order to predict an assets future price action in relation to that data set.
This is a very difficult task, however, it is possible for some people with adequate experience and understanding of price action.
It is only when the price action has been analyzed consistently for a certain period of time and the trader had made some money from it. It is then that he could feel confident enough to take a gamble at market reversal on the price movement.
One of the most common mistakes made by traders is that of short selling and long selling, which makes them go against the trend.
This is generally seen because it’s all in their mind that they can predict reversal before it happens, but if they “go into” trading without any proper analysis, they tend to lose more than they make. A good way to avoid this situation is by combining both long and short trading strategies at the same time.
Investing is different because investing is a long term speculation on the future price action of assets. Unlike trading, one does not need to have an adequate data set or experience of analyzing the asset. The person just needs to buy it at a cheap price and hold it till it reaches its peak value in the future., which s/he can sell it off at the right time and make a huge profit.
Therefore, trading requires knowledge in market analysis whereas investing requires knowledge in market judgement. There are however cases where people trade and invest at the same time, but that would depend on his approach.
Some people, though believe it the other way around; that investing requires you to have knowledge of the market as well as the ability to make sound investing decisions in order to make money. And trading “just” requires quick reactions to price movements and placing trades within a certain timeframe. It’s all about how you are seeing it.
Which is better: Investing or trading?
All in all, there’s no question that investing is better than trading to get-rich-slow. Investing doesn’t require the same skill level as day trading does and could be done by those with basic financial understanding.
Additionally it requires less on-going effort with little experience or knowledge of making large profit from day-to-day movements in prices.
Day trading does require a lot of knowledge and familiarity with the market, investing does not. Day traders are able to make considerable amounts of money from one small trade that they believe will be profitable, and compound it to accumulate their wealth.
This is possible because they can see price movements early, clearly and often. But this doesn’t mean that they are making correct decisions every time doing so, which might result as a waste of time + money.
In contrast, investors need to have enough knowledge about the markets and the asset in question in order to make intelligent decisions about their investments.
When comparing investing vs. trading, it really comes down to how much knowledge the person has about trading stocks or cryptocurrencies and what type of return they would like to experience in the process of doing so.
The easiest way to earn money from trading is to be able to buy crypto when it dips and sell when it spikes. But this requires someone who understands the market, has enough time and knows how much money to risk on each trade.
On the contrary, investing could be done even by those who don’t have these things because they just need to purchase assets which have the potential to increase in value over time.
This comparison between investing and trading hopefully clarifies the facts and myths about these pillars of the whole economic system. Comparing investing vs. trading is like a permanent solution with something that is purely short-term.
The most important thing is not to focus on how much you make in one day or month. But rather focus on the long term trends that will allow you to make money throughout your investment period. When I say long term, I don’t mean it for the “Investors” alone. If you have read the article properly, you know what I’m trying to say; that trading too, can be a long term investment with better odds, if done in the right way.
Regardless of whether you are a trader or an investor, it’s not about how much risk you are taking. It rather should be your level of skill and patience, divided by the risk you take. It’s really important to identify yourself, and your current skill levels, without getting biased.