TRADING VS. INVESTMENTS
Trading and investments are both methods of trying to make profit in the financial markets.
Traders take smaller more frequent profits while investors seek larger returns over an extended period of time. They however vary in various aspects and features.
Investment entails buying and holding of financial assets such as portfolio stock, baskets of stocks, mutual funds, bonds and other investment instruments. It aims at building wealth gradually over an extended time period. Investors take advantage of growth opportunities that come along the way such as interests, dividends and stock splits. Profits are enhanced by compounding, or reinvesting any profits and dividends into more shares of stock. Investors are more concerned with market fundamentals like price/earnings ratio and management forecasts. They will ride out the downtrends of market fluctuations with future expectations of rebound in prices and eventual recovery of any losses made.
Investments can also take the form of
- Cash or currency investments such as certificates of deposits and money market funds whose returns are in the form of interest payments. They lower risks but have lower returns.
- Bonds wherein individuals buy predefined schedule of a fixed interest rate and promise to return your money on a specific maturity date.
- Stocks wherein buying a share of a stock gives you an entitlement to a fraction of the assets of that company. The stock prices are determined by the forces of demand and supply.
- Jewels and gems such as diamonds last a long time and appreciate in value almost at the rate of monetary inflation. It is therefore a good investment though it might be difficult to find a buyer that shares your taste and fashion.
- Money market investment deals in fixed income securities unlike the bond market though it deals in short term debt and monetary instruments.
Investments involve some form of risk such as investment in equities and inflation risk. Normally, people would prefer to risk their money on investments in properties and works of art since they have been proved to be profitable, less risky and less complex.
Trading, on the other hand aims at generating returns that exceed the buy -and -hold investment. It entails the buying and selling of stock, commodities, currency pairs and binary options (cash -or -nothing binary option and asset- or–nothing binary option), real estate trading, foreign exchange (FOREX) which is a globalized market for trading of currencies and other instruments at a high frequency. Profits are generated by selling at prices that exceed the buying prices and within a relatively short period of time. Traders are more concerned with technical analysis tools like moving averages and stochastic oscillators to determine the high probability trading setups.
Traders are generally categorized into four:
- Position trader wherein positions are held for months or years.
- Swing trader wherein positions are held for days to weeks
- Day trader wherein positions are held throughout the day with no overnight positions
- Scalp trader wherein positions are held form seconds to minutes with no overnight positions.
Trade is quite complex and requires many related skills and knowledge that can be gotten from advisors and using relevant databases
Factors determining trading style are account size, amount of time they can dedicate to trading, level of trading experience, personality and how much the trader can tolerate risks.