Shares Guides

Difference between Investing and Trading

Investing and Trading are often thought of as synonymous – referring to the general buying and selling of shares. Whilst the latter part is true, in reality they are two very different concepts and require different mindsets.

One of the distinctions if not the key distinction between Investing and Trading is the duration. Investing is for the mid-long term, having a suggested time-frame of 5 years and beyond. Trading Strategies can vary and can including opening and closing positions on shares within seconds (the equivalent of buying and selling when investing).

Although the one similarity between the pair is that they allow you to profit and make a loss from the market!

Investing, Here for the Mid-Long Term

Investing is generally viewed as suitable for a minimum of 5 years. You benefit from investing when you sell your investment at a higher price than what you purchased it at (capital gains) and / or from receiving income in the form of dividends or interest (or coupon for a bond).

When you invest, you will need an account like a Share Dealing Account or Stocks & Shares ISA to house your investment. You will physically be buying the asset. You will also need to provide the full-outlay of capital to buy the desired amount of shares in a company. So if a share is 100p and you want 5 shares, you will have to spend 5 pounds (500p). Your broker will charge you per buy and sell (a dealing commission).

It may sound fairly obviously, but to summarise you are physically buying an financial instrument with a view to keeping it and profiting from it for a lengthy period of time.

Trading, Here for the Short-Term, Even Seconds!

Now Trading is generally viewed as being as suitable for whatever time it takes for you to make a profit either from the increase in the price of a financial instrument or even the decrease! This is because you go ‘long’ or go ‘short’ depending on the ‘position’ you take.

When you Trade, you also need an account, but it will be something like a ‘Spread Betting Account’ and you will not be physically be buying the asset, more like making a bet (an educated bet) on whether it will rise or fall on a points basis. Whilst Investing you will be more likely buying shares or funds, with Trading you can trade positions on a greater range of financial instruments; shares, currencies, commodities, cryptocurrencies and a whole lot more!

When you Spread Bet, you are using a ‘leveraged’ product, which means you are taking a position that is worth more than your initial outlay. This can increase your gains or losses. This differs to Investing whereby you need the full amount of capital to by the required amount of shares or a fund.

Some of the Trading styles are reflective of it’s short-term nature. Day-Trading (opening and closing a position on the same day) and Scalp Trading (holding a position for seconds to minutes to make frequent small profits) reflect the short-term nature of Trading compared to Investing.

What’s Better?

Investing generally entails much less risk than Trading. This is because it has a long-term horizon and your losses are only limited to the amount of your initial outlay. If you invest in funds, you are also benefiting from the experience and expertise of a fund manager.

Trading on the other-hand carries greater risk. It has a focus on the short-term, you can lose more than your original outlay and less time for your position to come good (if you leave a losing position for too long, you could end up losing a great deal of money). But get it right and Trading can be very profitable and return large amounts of capital to you in days or weeks! One of the key benefits is that it allows you to profit from a fall in prices too (so long as you open a short position).

The choice is yours but the same principle applies to you; be completely comfortable with what you are putting your money on or in. Know the ins and outs, the rationale behind the investment or trade and of course keep a very close eye on it. And there’s no reason why you can’t do both!

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