What is the difference between investing and trading? Or is trading similar to investing? The answers to these questions can be contentious, especially when considering the traditional definition of investing, as well as when considering the more technical description of what an investor does as compared to what a trader does.
Investing vs Trading: Examining and Explaining the Difference
General and Specific Definitions
To invest is to expend something with an expectation that doing so would achieve a favorable result. This is the general definition of investing. A more specific and finance-centric definition describes investing as the act of putting money to work to achieve profit or material results.
Hence, considering the aforementioned, trading from a finance perspective can also be considered a form of investing because it involves purchasing assets such as securities, financial instruments, and commodities and offloading them once their value increase.
But there is a strict difference between investing and trading as far as technical jargons and finance literature are concerned.
Investing entails a buy-and-hold approach to purchasing assets in an attempt to receive larger returns over an extended period. Trading involves a buy-and-sell approach and entails more frequent transactions for minimal but frequent returns.
Blurred Definitions and Usages
The difference between the two becomes blurred when considering one of the two major forms of investment strategy: active investing.
An active approach to investing demands purchasing assets and offloading them as soon as possible to maximize the earning potential of changes in relevant financial markets. Note that passive investing involves a longer buy-and-hold approach.
Some finance experts such as analysts, writers, and investors themselves use more specific terminologies: trading versus buy-and-hold investing. An active approach to investing fundamentally involves trading or more frequent buy-and-sell transactions.
Passive investing can also be considered buy-and-hold investing. Hence, when comparing trading versus investing, some also reference and compare the respective advantages and disadvantages of active investing and passive investing.
Takeaway and Pointers: Choosing Between Investing and Trading
An example of trading is purchasing individual stocks from a broker or trading platform, monitoring and analyzing their performance, anticipating future movements, and deciding whether to offload them once their values have increased.
Examples of buy-and-hold investing or passive investing are purchasing individual stocks and holding them for at least two years, as well as investing in passively managed pooled funds such as the index funds of mutual funds or unit investment trust funds.
Choosing whether to invest for the long haul or trade for more immediate and frequent gains should be based on your preferences. Remember that it is important to determine first your financial goals and objectives, as well as your risk profile.