There are two different ways of making money in the financial markets – investing and trading. Both attempt to make a profit, but each goes about it in a different way.
Investors look to make profits by seeking bigger returns over longer periods by purchasing and retaining assets. However, traders use the rise and fall of markets to their advantage by entering and exiting positions across a shorter time horizon, making smaller but more frequent profits.
This Moneyfarm guide examines trading vs investing and explains the key difference between the two concepts. By helping you to understand these differences, you will be able to make better-informed decisions as you seek to achieve your financial goals.
| How quickly can you see returns from trading versus investing? | You can potentially see returns quickly with trading (same day), while profit from investing happens over time. |
| What are some common types of investments? | Common investment types include stocks, bonds, mutual funds, ETFs, ISAs, and SIPPs. |
| Is trading or investing riskier? | Both carry risk, but trading may be riskier due to the high frequency of transactions and susceptibility to short-term market volatility. |
| Which is better for beginners, trading or investing? | Investing is better for beginners as it is more passive and less time intensive. However, the choice also depends on the individual’s financial goals, time commitment, risk tolerance, and financial knowledge. |
What are the key similarities between trading and investing?
Although there is a marked difference between trading and investing, there are several key similarities. These are in addition to the fact that both concepts aim to make profits from things like bonds, commodities, currencies, and stocks and shares.
Understanding and analysing financial markets
In order to make informed decisions, both traders and investors have to have an understanding of the workings of the financial marketplace. Both concepts involve analysing economic indicators, studying market trends and keeping up to date regarding information about companies.
Understanding and managing risk
When analysing trading vs investing, it can be seen that both carry risk, and understanding that risk and what it could mean is essential. Investors and traders both employ certain strategies in order to try to protect their capital and minimise potential losses – strategies such as specifying stop-loss orders and diversifying their portfolios.
Emotional discipline
Having emotional discipline is important to both traders and investors. It’s all too easy to allow emotions like fear, greed, and impatience to impact your decision-making negatively. It’s essential to understand your investor profile, and develop and follow a specific investment strategy.
It’s also important to review any investing strategy from time to time, but in a considered way, not as a knee-jerk reaction to current events.
What are the key differences between trading and investing?
When reviewing the trading vs investing debate, it is apparent that while there are several common aspects they share, they are quite different concepts.
Time Frame
Investors consider a longer time frame for their investments; for example, they buy and hold their financial assets for longer than one year. On the other hand, traders or day traders, as some are known, often carry out their trades in weeks, hours or even minutes.
Differences in potential risk
Trading might be considered riskier in the trading vs investing comparison because the assets are held for a shorter time. With investing, investors are willing to hold on to assets for longer, so they can probably ride out periods of market depression. Traders may also include other types of assets in their portfolios, such as futures and swaps, which could also be riskier.
Dedication, time, and in-depth knowledge
Traders are often professional organisations, whereas many investors are amateurs and hobbyists. Trading requires deeper levels of economy, market, and trading knowledge, while investing requires company and industry knowledge.
What’s more profitable, Investing or Trading?
There is no straightforward answer. It depends on the person and their financial position. Both can return a profit, and the answer is a personal one depending to a large extent on your tolerance to risk.
While it’s true that a significant increase in asset prices can happen overnight, so too can significant decreases, which is why you have to know the market. When it comes to the trading vs investing argument, some investors combine both concepts as part of their diversification strategy.
Is trading harder than investing?
Although it comes down to levels of skill and knowledge, in the trading vs investing debate, trading is probably more complex. It requires technical analysis and involves constant monitoring of market influences, trends and movements, which is why it is often professionals and businesses that get involved.
Which is riskier, trading or investing?
Investing, by its very nature, always carries an element of risk. But personal trading and day trading is considerably riskier than long-term investing, particularly when markets are volatile.
Where to start trading?
CFD trading vs stock trading could be an option you might want to think about. The initials CFD stand for “Contract for Difference.”
Rather than owning shares, CFD trading involves you entering into a contract that grants you exposure to an asset’s price movements. These assets can be commodities, Forex, indices, shares or something else. You opt for a long or short contract. When the time is up, you sell the assets, and whether the prices have increased or fallen determines whether you make a profit or a loss.
CFD trading is risky. In fact, according to the Investinggoal.com, 83% of retail accounts initially make a loss.
The Freetrade vs Trading 212 debate
In the Trading 212 vs Freetrade debate, both platforms advertise themselves as offering commission-free trading services, although Trading 212 levies a 0.15% fee if you want to trade Forex vs stock in a different currency from your account currency.
Both platforms offer trading various assets, including shares, fractional shares, ETFs and ISAs, but Freetrade only offers SIPPs and GIAs (general investment accounts), while Trading 212 only offers CFDs.
Some people believe that Trading 21 has the edge as they offer a wider variety of shares and other investments, such as crypto.
Where to start investing?
Risk is undoubtedly the biggest factor in the Trading 212 CFD vs an investing strategy that involves long-term investing in the stock market argument. Investing in ETFs vs funds or ETFs vs stocks long-term is generally considered less risky than trading CFDs.
It’s the same with personal trading. It is suitable for knowledgeable, skilled traders and investors but riskier for amateurs and those with little less know-how.
For those who want to know the best way to invest 10k, ETFs or index funds are worth consideration.
ETFs are a type of index fund. They are also similar to mutual funds. But the main difference between an ETF and a mutual fund is that while an ETF tracks a market and is usually passively managed, mutual funds attempt to outperform the market. Therefore, most mutual funds are actively managed causing financial institutions to charge higher management fees.
The Trading 212 invest vs ISA debate
Now for the Trading 212 ISA vs invest account debate. Which is best?
As with many accounts in the world of financial investing, both of these types of accounts have their similarities, but there is one significant difference, and it is that the ISA account, unlike the Trading 212 invest account, is tax-free.
Please note, Moneyfarm does not offer trading 212 account services. However, you can invest in our ISA accounts and choose different portfolios that match your risk profile and values.
Getting your financial planning right
If you aim to build wealth, you must first get your financial planning right. It is a prerequisite for all long-term investors, whether employed or self-employed. If you are self-employed or are considering becoming so, don’t forget to make use of your trading income allowance.
For many people, the ultimate goal is investing for income in retirement, and this can lead to a temptation to pick high-return investments in the UK. But this brings us straight back to your tolerance for risk. Higher-return investments tend to carry higher risks.
The value of invested funds can fall from time to time, which is why so many investors opt for a longer-term investment strategy. It serves as a reminder that in the trading vs investment argument, the risk of day and short-term trading is that much higher.
A stocks and shares ISA is one of the best options for investing. Interest rates are higher with this type of account than with other financial investment vehicles like bond investments. The effect of compound interest can work its magic over the years. Also, the diversification that ETFs offer, including a partial investment in bonds for stability, can provide you with good capital gains and tax-free income in your retirement years.
FAQ
Can I do both trading and investing?
You can trade and invest simultaneously as long as you have the technical and financial knowledge. Trading may be used for your short-term goals, while investing may be for long-term financial growth.
How does the time commitment differ between trading and investing?
Typically, trading requires a substantial time commitment because it involves frequent transactions and economic and market analysis. In contrast, investing generally requires less direct management once the initial investments are made.
What skills are required for trading and investing?
Technical skills are required for trading to analyse short-term market fluctuations, while fundamental analysis skills are required for investing to evaluate long-term growth prospects of assets.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
