TradingGame

To Trade or to Invest? Comparisons on Trading and Long-Term Investing

A standard Formula 1 race typically lasts around 90 minutes as each race is defined as the smallest number of complete laps that exceeds 305 kilometers. In motorsport, this is defined as a sprint race, compared to endurance races such as the historically iconic 24 Hour of Le Mans or the extremely grueling Dakar Rally, in which participants cover a total distance of more than 9,000 kilometers over the course of two weeks. While this is a somewhat crude analogy, it works well enough as a rough illustration of the difference between trading and investing, just without the breakneck speed.

Both trading and investing involves you trying to make money in the financial market but the crucial difference lies in the way your income is generated. Investing involves you holding to financial assets such as stocks and mutual funds and enjoying the profits and dividends generated by those same assets over time. On the other hand, as any trading books and gurus could tell you, there is only simple guiding principle when it comes to trading, buy low and sell high. It’s only one simple difference, and yet this crucial divide eventually balloons into two very distinct financial opportunities with vastly different characteristics and operators, some of which would be outlined below.

It’s a matter of time and it’s a matter of timing

One of the most fundamental differences between the two involves around time and timing. As investing relies on dividends and profit generated from an asset, it’s natural for an investor to hold on to an asset for years, decades or if the particular asset you’re investing in stays perpetually profitable, it’s not impossible to hold to an asset throughout generations. Trading in comparison involves a much higher turnaround, but the frequency itself depends on what kind of trader we’re talking about.

• Position trader holds to an asset for months or even years. This kind of trader usually relies on spotting trends in the market ahead of anyone else, like shoring up on stock after spotting a bull market when it’s about to hit and selling off those same stocks when a recession or a slowdown is imminent.

• Swing trader holds to an asset for days and weeks. Quite similar to a position trader but a swing trader relies more on short-term movement patterns and trends. Generally, this kind of trader tries to look for momentum relating to an asset rather than general market trends and adapts their strategy to fit the situation.

• Day trader holds to an asset within the span of a day, there is no open trade by the end of the day. This requires the biggest commitment of the trader and usually involves the highest amount of analysis and tools. Even the slightest bit of news story could move the price of an asset and being a day trader requires you to be the first to react and take advantage of that news. The irony is that even though day trading quite possibly takes the most out of the trader, it’s quite popular among inexperienced traders.