When it comes to trading vs investing and which is better, the first question I ask is: what are your goals? Trading and investing have many similarities – find great opportunities and watch your money (hopefully) grow. The biggest differences between the two are timeframe and appetite for risk.
Trading vs investing: what’s your timeline?
An investor’s timeline is far longer than a trader’s. A trader often buys and sells same-day, same-week or same-month. As a result, the trader is more in tune with daily market action. That’s not to say an investor cares little about daily market movements. Big surges in volatility offer great opportunities for an investor to scoop up bargains.
What’s your risk tolerance?
An investor’s returns mirror that of the broader market: a slow and steady progression towards wealth. This strategy is proven over time to be a solid one. Look back at any indices historical chart, and you’ll see that the markets move up and to the right. Consistent contributions into a retirement account over decades often yield in a comfortable pile of money that can be enjoyed during retirement years. There is always risk in investing in the stock market of course, but with a long timeframe, you can be sure of a decent return.
Traders tend to have a higher risk tolerance. They embrace the volatility of the markets and take advantage of short-term opportunities. That’s not to say they throw caution to the wind! When the market pulls back, a trader looks for names that are supported by technical and sentiment indicators. He or she pays close attention to those indicators at all times, using them to read the charts and understand the next move. He or she may buy or sell constantly during bouts of volatility, never afraid to seek out and act on the next great trade.
Because of these different approaches, a trader often beats the indices on returns, especially in a stock picker’s market. Both approaches can win over time. It’s up to you to determine the timeline and risk levels that work best for you.
