Trading vs Investing - Which One is Better?
By Stefano Treviso, Updated on: Dec 15 2023.
Investors seek to grow their capital without having much concern over the timeframe for this to happen whereas traders seek larger short term returns. Traders usually have a bigger risk appetite. The choice between investing and trading boils down to your risk tolerance and speed expectations for your capital to grow.
Investing - What is it?
Investing consists of dedicating resources with the expectation to produce a benefit. When you use your time, energy or money in order to achieve something that could bring some benefit, you invested.
Financially speaking, investing has to do with money, that’s the main resource that we’re using.
The best example of investing is real estate, one of the oldest businesses that everyone is familiar with.
- You buy a house project that hasn’t been built and sell it later at a higher price when its finished
- You buy a house in bad conditions with potential to improve, renovate it and sell it at a higher price
Some other examples of investing are:
- Investing in the stock market on companies that you value for the long term
- Investing in mutual funds
- Investing in Bonds
- Investing in precious metals
- Investing privately on startup companies you believe in
There are many types of investments to chose from, the most important thing to understand is that investing is all about creating and growing value.
For example, if you choose to invest in stocks of TSLA (Tesla) or AAPL (Apple) you’re doing it not to quickly sell them for a profit one day after, you’re doing it for the long term with the clear intention of collecting dividends and watching your capital grow over the years.
Eventually you’ll cash out your investments, but you’re not desperate to do so under a short timeframe, you’re in it for the long haul.
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Trading - What is it?
Trading involves frequently buying or selling financial instruments such as stocks, futures, options, commodities, currencies, cryptocurrencies or many more.
Traders don’t really care about generating value for the long term, they just want to either:
- Buy something cheap and sell it at a higher price to profit
- Take something at a higher price and short-sell it (bet against it) to profit
All of this in short periods of time to try and beat the returns that investors could get in the long run.
Traders usually have a higher risk appetite which is not optional in comparison to investors. The mere fact of entering the market with the intention of exiting in a shorter timeframe to catch a few dollars difference in price can lead either to spectacular returns in short periods of time or spectacular loses.
There are several trading styles that vary according to the timeframe that positions last open such as:
- Swing Trading: holding trades open for a few days or even weeks
- Day Trading: holding positions open no longer than a single trading day (at the end of the day all trading positions are closed)
- Scalping: holding positions for minutes or even smaller timeframes like a few seconds.
There's also another style known as position trading which involves holding trades open for months or years, but that's almost getting into the same area as investing so it doesn't make that much sense to include it as a trading style regardless of everyone doing it.
One of the main tools that traders use is financial leverage which allows them to amplify their buying power in order to maximize their risk/reward potential. This tool comes at a cost, and it's not common for a position trader to have a leveraged trade open for years paying fees every day. Leverage is a high risk tool and its usually not found in the investors toolbox.
Another very important point to consider is the type of asset you choose to trade/invest, as it can have a great impact on the category that you’re placing yourself, for example:
- Purchasing a house is a slow transaction, takes time, returns will come in the future, no real hurries
- Trading future contracts comes with a deadline to settle them, your exposure is right there and cannot be avoided or waited out
- Trading options comes with a deadline to either exercise it if it’s profitable or to let it go to waste if it’s not. Once you’re in, you’re in and can’t back off, it will all happen under a short timeframe in comparison to investing in real estate
Conclusion - Which one is better?
Investing gives you the possibility to choose between various levels of risk, there are extremely low risk investments such as real estate or higher risk investments like startup companies with ambitious projects that could fail easily.
Trading doesn’t gives you the option to participate in a low risk scenario, all trading activity has got only 2 options:
- Risky
- Extremely Risky
There’s no optional attribute for the risk factor when it comes to trading.
This is mostly due to traders using financial leverage, causing them to exponentially increases their level of risk/reward by huge multipliers.
Ultimately the choice of which one is better for you boils down to the following questions:
- What’s your risk appetite?
- How much time you’ve got?
- How much capital you’ve got?
Here are some possible answers to know which style is better for you:
- If your risk appetite is high, your timeframes are short and you’ve got any size of capital, trading is a suitable option for these preferences
- If your risk appetite is low, your timeframes are long and you’ve got any size of capital, investing is a suitable option for these preferences
- If your risk appetite is low, your timeframes are short and your capital is low, then you should forget about trading or investing at all and focus on getting a higher income through a better job so then you can choose between investing or trading.
The most important thing to remember is that both activities: trading or investing, require SPARE money.
There’s no such thing as a successful investor or trader that cannot make ends meet and uses his food money to invest or trade, that will put you on a bad psychological position to make wrong decisions for yourself.
Whenever you choose to invest or trade, you must do so with money you can afford to lose without affecting your sleep even a tiniest bit.
Good luck and happy trading or investing!