The stock market is an elusive ghost to some and an intimate friend to others. As the global marketplace continues to become smaller, new trading and investment opportunities become available. Foreign markets, cryptocurrency, and even international real estate deals are options for today’s investors. Newcomers have many questions, and many people wonder about the difference between trading and investing. Here are some basic guidelines for novices and solid reminders for trading veterans.
One of the main differences between trading and investing is the frequency of transactions. Day trading, or conducting multiple transactions within a short window of time is more process-oriented than traditional investing. Investments are typically designed to be purchased and held until a time when they can be sold at a maximum investment. Day trades may be smaller in scope than real property investments, but the end result is the same. Active traders buy a stock at a relatively low price and resell when the price increases, sometimes even slightly.
The types of purchases also indicate whether a person is more interested in trading or investing. Bonds are a great example to illustrate this point. There is typically a waiting period between the purchase date and the maturity date, making them more of an investment than an active trading vehicle. Junk bonds and some government bonds of varying degrees of risk are traded on aftermarket platforms, which can be lucrative speculations for traders. Purchases such as rental property or Individual Retirement Account holdings are longer-term investments. Trading often requires less upfront investment capital than other types of financial transactions that attract traditional investors.
Personal financial goals are another big difference between trading and investing. Active traders are able to accept more risk and focus on short term profits. Investing requires a bit more patience and is designed to result in a steady return on investment over a specified time period. Retirement planning is an example of time-sensitive investing. Trading is primarily concerned with individual transactions and the net yield after brokerage or service fees. Investing focuses on building a diversified portfolio that serves an individual investor rather than a stock market graph. Both types of transactions have benefits and drawbacks. Investors should consider their end goals before undertaking any type of financial transaction.