What is the difference between trading and investing?

What is the difference between trading and investing?

Both trading and investing can be categorised as using money you already have to create more money. One of the key differences between trading and investing is duration. Investing is seen as longer term in nature.

In this context, longer term usually means several months upwards to several years or even decades. Investing often has a specific purpose, for example, saving for a pension. There are many different ways to invest and save, over and above cash holdings. Stocks and shares are a popular way of investing for the longer term. You are investing in a specific company because there is something you like about that company, maybe new products, profit growth, new markets, dividend yield, and so on.

Companies with a track record of profit growth and potential tend to increase in value. A popular investment, certainly in the UK, is property. Both residential and commercial property can be considered as investments. Both can offer capital appreciation and an annual return in the form of rental yields. The downside can be unpredictable maintenance costs.

Another category of investment is collectibles. There are many different forms collectibles can take, such as art, antiques, classic cars, fine wine, coins and stamps, etc. You may choose to invest in these for other reasons, such as in interest in classic cars. Or it may be the beauty of art and antiques gracing your home and quietly appreciating in value.

Let’s look now at trading. One of the key differences between trading and investing is duration. Trading is short term. Short term can mean just minutes, hours or days. Trading is deliberately buying and selling in order to generate a profit.

Stocks and shares can be traded short term. You no longer have an interest in a specific company, it’s growth prospects or dividend. You care more about the likely price movement over the next few hours or days. The name given to people who trade shares like this is traders. Property. Both residential and commercial property can be traded. The name given to property traders is real estate agents. In the same way, collectibles are traded by professionals. There are art and antique dealers, often specialising in certain styles or specific artists, car dealers or garages, wine merchants, coin and stamp dealers and so forth. Trading in collectibles is normally done as a business, requiring business premises as physical objects are involved, plus an interest, knowledge and experience. In much the same way, being a financial trader should also be treated as a business, although you won’t need business premises.

As trading is buying and selling to make a profit, you are always concerned with the price you pay and the price you charge for something to make a profit for the business. A slight change in terminology from trading to being a trader. Trading is deliberately buying and selling in order to generate a profit. As we’ve already seen, traders in physical assets are given specific names and categorised as such. Trading in financial products is something anyone can do from home. People trading financial instruments are just called traders. As a trader, you buy something because you expect to sell it at a higher price to make a profit.

You speculate on the future value being higher or lower than it is at the moment. The largest market on the planet is Forex. Sometimes abbreviated to FX, Forex stands for foreign exchange, or trading currencies against each other, speculating on currency movement in the markets. Other financial instruments can be traded, including shares in companies on many stock markets around the world. Stock market indices can also be traded, for example, the Dow, S&P, FTSE, DAX and so forth. Commodities, including gold, oil and agricultural products such as corn and rice are also heavily traded. When considering whether to trade or invest, it is likely you will want to do both. You are likely to have both long term and short term financial objectives.

Invest for the long term, or capital growth. Trade for the short term, or income. You don’t need to stick to one thing when trading or investing. But dealing costs should be considered carefully. Stocks and shares are relatively low cost, whereas you are likely to pay a much higher proportion of the value of an asset to buy and sell fine art or property. Another consideration is liquidity.

By that, I mean how quickly could you realise the value of your investment? Trading is electronic and no physical product exchange takes place. A property could take weeks or months before you could realise your cash. Liquidity also means the number of buyers for your investment. Except for the very smallest companies, stock market liquidity is always there. Forex is guaranteed as long as the market is open, as you are always holding cash.

Finding a buyer for a piece of art or a property may take some time. Leverage is a normal consideration for property investment. As a buyer, you provide part of the finance in the form of a deposit, perhaps 20%, and obtain finance for the remaining 80% in the form of a mortgage. Leverage is not always offered on other investments, but is normal for trading the financial markets. You will often be asked for a 5 or 10% deposit on shares. The deposit on currencies, as they are cash, can be a fraction of 1%, making it possible to build a large portfolio with a smaller amount of money.

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