07:30 AM, 02 Mar 2024 (AUS EST)   The market is currently closed       

Investing VS Trading

Investing is the practice of committing money or other capital with the goal of gaining back more.

What is the advantage of investing? First think about how you make money – by working. But what happens if you quit your job or get fired? Obviously you quit making money. If you want more money from your job you either need to work longer hours or get a raise. With investing, you are putting your capital to work instead of doing the grunt work yourself. Investing allows you to generate income or capital growth by committing capital on a certain endeavor.

What Investing Is

People invest everyday sometimes without even realising it. When you put your money in a savings account and allow the bank to lend it out, you are engaging in low-risk investing. When you buy government bonds, you are lending your money to the government or corporation to be paid back with interest. When you buy shares in a company, you commit capital for their use to grow their business which, if they are successful, you can receive a combination of dividends and/or share price appreciation.

What Investing Is Not

Because investing carries an element of risk, some people think of it as gambling. Others use the word investing and trading interchangeably. Investing is neither of these. Why?

  • Gambling is a zero sum game where players pool their money and some win at the losers expense. Investing involves ownership of a company where you earn profit from company expansion.
  • Investing typically refers to a long-term prospect of years or decades whereas trading is used in the context of transactions that may last only seconds, hours, days or weeks.

Trading – What It Is and Isn't

While some people use the terms trading and investing in the same breath, there are key differences.

  • Investing is generally used when the objective is long-term such as buying blue chip stocks and collecting dividends over the next few decades. Trading is often used in conjunction with short-term financial goals. You buy a stock this week and hope to sell it a short time later for profit.
  • Trading focuses more heavily on the transaction process. When you buy and sell shares, you are trading. While someone might invest with a company for the next 20 years, they are trading shares when buying and selling.
  • A successful trader usually works at this as his full-time job. He watches prices rise and fall and has a system to buy and sell. Investors typically have other careers and use their savings to build wealth. Trading is most often active while investing can be passive.
  • Traders will focus heavily on price charts, news and other triggers that can greatly affect short-term price moves. Investors are often more concerned with valuation and fundamentals – or how the business will grow over the next 10 years and if share prices are at a good price today.

While investing can involve some elements of trading, and vice versa, they are two different concepts. Trading differs in length of goal, amount of time needed to accomplish that goal and methods to analyse stocks for profit potential.