What is the difference between a trader and an investor? What are the key differences between them and what do you see yourself being, a trader? an investor? or both?
Trading and investing has been vital in how the financial world and we as a human race have evolved. From bartering one to one to trading in markets to the invention of the first coinage to international trade and now globalized finance. The world is ever-shrinking in terms of accessing investing and trading opportunities. The trick is finding what is right for you.
Time frame Trading vs Investing
First, as it’s the most important factor is the time frame in which an asset is bought or sold.
As a trader, you will only hold the asset of a short amount of time. The goal is to buy the asset at a low price to then sell at a higher price. This is referred to as taking a “long position”. Cryptocurrencies have become popular to trade as their volatility creates never-ending opportunities to buy and sell at a profit or potentially a loss. Trading assets in a short time frame allows you to gain a profit for an asset in usually, a much quicker time frame than investing.
Investing is characterised as holding and accumulating assets over a longer period. This could be years, decades. The benefit of investing, accumulating and holding various assets over a longer period of times has many benefits relating to minimizing risk, smoothing out volatility, tax implications, dividends benefits, bring down average entry price, stress, time management and opportunity mitigation to mention a few. Investing can be done by anyone, new or experienced and is a life skill everyone should learn.
“It's just as profitable to spend time in the market, rather than timing the market“
- Trading involves a shorter period to gain the maximum amount of profit.
- Investors will likely buy, hold and accumulate an asset or set of assets over a longer period.
Market Analysis & Strategy Trading vs Investing
Both investing and trading involve making educated guesses based on historical technical data and fundamental analysis of the past, current and future market conditions to develop an investing strategy.
Technical Analysis refers to charting data with charting bars, lines and graphs. Many traders will stay glued to trading and charting screens to follow their trading strategy based on market price movements in minutes, hours, days or even weeks.
Fundamental analysis will look at the wider market conditions with pricing data forming just one small part of the wider strategy. Market analysis and research on the market will help to form, measure, monitor and execute fundament focused
Hybrid approaches for trading and investing strategies can include asset price, indicators, averages, world events, news and even the weather to create a set of rules to dictate their trading strategy. For any beginner, simpler is better.
A simple strategy employed by some investors is called: “dollar-cost averaging” which is the practice of investing in an asset recurring at the same time intervals in line with your overall investment size. An example would be buying $100 of a stock or asset every month before any other expenses. This buying, holding and accumulating helps to smooth our your average “entry” price to the asset. When a market is down trending, you will accumulate more. When the market is in an up-trend, you will accumulate less but your average price will stay relatively the same. Over a longer period, your average entry pricewill always be below the current market value. If this asset also bears interest for long term holding, you will benefit from the long term compounding interest.
Let’s take a look at asset bitcoin (BTC) as an example. Over the last three months, BTC has been incredibly volatile in its value and has risen by 170% from £3477 to £8176.
From an investor point a view it would be a great time to buy bitcoin on the low of £3477 to hold the asset. From a trader’s point of view, there would have been many opportunities to buy and sell BTC in this time frame to gain a profit.
- Traders look at the current economic climate of the asset and make trades within the market according.
- Investors think ahead by evaluating the entire market from both numbers and technical side, as well as a broader market sentiment based approached to make longer-term
Risk Trading vs Investing
Risk is a huge factor when making an investment or trade. The potential of losing the funds you put forward has to be taken into account before committing. It’s important to do your research and educate yourself as much as possible around the asset. Key factors to digest are the volatility and liquidity of the asset, how much capital you’re willing to risk and put forward, external market factors such as global events, manipulation of the market, and diversifying your portfolio.
When investing, the risk comes down to your exception and forecasting the value of the asset. If you'd envisioned the asset to gain a higher value than expected, and the value decreases, it may lead to a loss in your profit or capital. Take into account inflation, interest rates and the lucidity of the asset in question.
If you’re going to start trading, it’s vital to be clear and strict with per trade risk management. A google search would suggest deploying a maximum of 0.5 - 1% of your capital per trade when starting. You may feel more confident in putting a higher percentage forward, once you’ve analysed the assets preference. Diversifying the assess across your trading portfolio does not guarantee a loss of capital. However, it will create more opportunities to gain higher returns at a lower risk.
Unfortunately, the market can be manipulated, which is when there’s been an artificial manifestation of the supply and demand in the market. That’s why again, it’s so important to understand the market you’re going to enter and not be influenced by misleading information, the more you educate yourself the better!
Mindset Trading vs Investing
For an investor, patience and strategic thinking is key. It can be sometimes tempting to exit your position early when you see the value dropping to preserve capital or rising value to take some quick profits. However, it might not be the most profitable time to do so. Taking a longer outlook on market cycles is generally less stressful and much more time-efficient to manage when looking at monthly and yearly cycles. Without being glued to a screen looking at numbers, your key focus can remain on your job or business as well as your family.
Thinking like a trader requires you to be comfortable with taking risks, and accepting losing trades as part of your strategy development. A successful trader will continue to use and refine their strategy over time, rather than just guess and gamble on the outcome of every trade. Traders adopt discipline in their trading strategies and won't steer towards being overly enthusiastic when winning trade, then overly disappointed when losing. Sticking to a strategy is key to not only measure profit vs loss but also winning trades vs losing trades as well as a plethora of additional data that will help develop the strategy long term.
- Investing requires patience and strategic thinking.
- Trading requires discipline, adjusting your strategy, market analysis and spotting trends. Being unemotional when trading and having risk management.
Conclusion Trading vs Investing
Investing and trading both involve very different strategies, time frames mindset and core values. Neither are the born and true best way to make money, but both are important to learn and distinguish between. It’s important to only invest or trade what you can afford to lose. Trading can certainly be thrilling and a quick way to gain profit, whereas investing requires a longer-term vision for the asset’s performance.
This guide can be used for almost any time of investing or trading. When looking at a brand new asset class like bitcoin and cryptocurrencies, some of these risks can be greater than traditional markets due to volatility. But with volatility presents greater upside potential.
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