In general, there are two common approaches to making money from the market, namely investing and trading . Although both use similar assets or instruments, there are differences between investing and trading that must be known.
Investment is basically an activity carried out to build assets or wealth in the long term, while trading is an activity carried out to generate profits in the short term, even for a relatively short time.
The most common thing that distinguishes investing from trading is the mention of both actors. If investors are people who carry out investment activities, then traders are people who carry out trading activities.
However, there are other differences between investing and trading that you need to know. Anything? Check out the following explanation.
Difference between Investing and Trading
Although it has been explained briefly about the difference between investing and trading, many people are still confused or need a more detailed explanation of the difference between the two financial activities. Apart from the differences in the name of the perpetrator and the timeframe used, here are some things that distinguish between investing and trading.
When going to invest or trade, of course the perpetrator has a purpose. If investing aims to build assets or wealth in the long term or over a long period of time, then trading aims to gain instant profits in the short term, aka a short time span.
For example, an investor in a stock instrument invests to generate wealth by buying a stock that is of good value and holding it for some time before the stock is resold at a high price. Meanwhile, a trader will buy shares for resale in a very short period of time.
To determine when is the right time to make purchases and sales, several considerations are needed. For example, in investing, buying or selling decisions are not influenced by the level of market fluctuations because the goal is long-term goals.
It is different with the decisions that traders have to take to make a profit. A trader must be observant in seeing market fluctuations because it greatly influences decision making. If you make a wrong move, it could be a loss.
The timeframe itself also varies. Long-term investments are usually made in a period of three years to decades. Meanwhile, trading is carried out on a daily or weekly timeframe.
After determining the purpose of investing or trading, of course, the perpetrators of the two financial activities must see or consider the existing risk profile. This is important because each transaction in the capital market has a different potential for profit and a different level of risk.
An investment can be said to have a low level of risk if the potential profit is also low and can be obtained in a relatively short period of time. Conversely, a type of investment that has the potential to provide high returns tends to have a high level of risk.
In the world of trading, almost every transaction carried out carries a fairly high level of risk of loss. This is due to the dependence of trading activities on the level of market fluctuations, both the stock market and other instruments such as foreign exchange and commodities. However, of course the benefits derived from short-term trading are greater than long-term investments.
So, if in investing you can choose which instrument suits your risk profile, then in trading, you must be prepared with the level of risk that exists.
3. The profile of the perpetrator
The next difference between investing and trading is the actor’s profile. This is closely related to the level of risk for the two financial activities. In investing activities, an investor can have a low risk profile by studying the company’s fundamentals and the potential of the business sector.
After knowing the risk profile, investors will buy shares in accordance with the level of risk they have and hold the shares for a certain period of time. This investment strategy is carried out to create wealth with compound interest and the acquisition of profits or dividends.
Meanwhile, trading activities will only be carried out by people who have a high risk profile. Traders are usually people who are ready to suffer big losses in a short span of time. Therefore, a trader is required to be proficient in conducting technical analysis of stocks, watching market fluctuations carefully, and making the right decisions.
That way, a trader will be able to know when is the right time to buy or sell his assets. People who enter the world of trading must be actively involved in the market so that they are able to find the right time to buy and sell to get the maximum profit.
4. Benefits obtained & accompanying elements
This is one of the indicators that is the difference between investing and trading, namely the benefits derived from these two activities and the protective element that accompanies them.
In investing, an investor can get benefits in the form of dividends, bonuses, stock splits, and others. Meanwhile, in trading, a trader will only benefit in the form of very large profits from selling assets that are carried out properly.
If you are a beginner in the world of investing and trading, then keep in mind that the big profits obtained from trading activities are not merely the result of transactions. You also need to apply the right trading strategy so that you can see price movements in the market carefully.
Apart from the benefits, there are also differences between investing and trading in terms of the protective element that accompanies the two activities. In the investment world, the decline in stock prices has no significant effect on the losses that may be felt by investors.
If investors have purchased shares of companies that have strong fundamentals, the company’s stock price will recover over time. Moreover, the investment objective is a long-term goal.
In this case, investors only need to pay attention to the company’s performance on a quarterly or annual basis and how much profit investors get from the company’s performance.
This is different from trading where the profit value will be greatly influenced by the level of daily or weekly price fluctuations. Therefore, a stop loss protective element is needed as a limit to the losses that a trader may experience .
The loss limit is not determined by other people or the market, but by the trader himself. So, if the price movement in the market is not in accordance with the trader ‘s wishes and touches the stop loss, then the order placed is stopped automatically so that the position held by the trader at that time will be sold.
On the other hand, when the position is profitable, the trader has a protective element called take profit . This limit is used to limit how much profit a trader wants to receive so that the amount is in accordance with the wishes or plans that have been determined.
That’s an explanation of what the differences between investing and trading are that you need to know.