Three things that makes trading different from investing

Julie Brownlee, Fsp Invest, 02 Sep. 2015

Tags: trading, what is trading, trading versus investing, investing



If you’re new to the workings of the stock market, you’ve probably come across the terms ‘investing’ and ‘trading’.

So what makes trading different to investing?

Let’s take a closer look…



#1: Investing is for the long-term, trading is for the short-term


If you invest, chances are your investment horizon will be more long-term. This means you buy shares or unit trusts with the view to hold them for a minimum of a year. Some investors hold shares for decades.

On the other hand, trading is short-term in nature. Some traders are in and out of trades in a matter of hours. Other traders hold positions open for a few days, a week or two, or a month.

Trading isn’t for the long-term. It’s all about speculating on the short-term movement of the asset you decide to trade.


#2: Trading comes with higher risks than investing


Another difference is the risk factor.

When you invest in shares or unit trusts, the most you can lose is the amount you invest. And chances are unless you make a really awful pick, you’re not going to lose all your money.

With trading, you can lose more than you initially put down on a trade. This is because traders use financial derivatives to turbo charge their potential gains. But this turbo charge effect also works on losses.

Financial derivatives traders use include single stock futures, contracts for difference (CFDs) and spread trading.

Many investors aren’t comfortable trading financial derivatives due to the higher risks.


#3: You can put speculate a price will fall with trading


Another aspect that makes trading different from investing is that you can potentially profit from an asset price falling.

Traders do this by selling something they don’t own and buying it back in the future. This is known as shorting or going short.

So there you have it. Three things that makes trading different from investing.

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