The buying and selling of securities in the contemporary financial environment is a multifaceted discipline. People from all walks of life participate in the markets, creating a diversity of strategies and objectives.
At first glance, investing and trading may appear synonymous. The primary goal of each is to sustain profitability through buying securities low and selling them high. While taking money out of the markets may be the ultimate aspiration of all traders and investors, the methodology behind doing so is very different.
Investing vs. Trading: Which is which?
Nearly all market participants are readily classified as being one of two things: a trader or investor. While both meet in the marketplace to conduct business, each follows a very different approach to achieving their respective goals.
An investor transfers money in and out of a wide variety of assets to preserve and grow wealth. Investors take a more traditional view of the markets, allocating capital to lower-risk plans capable of outperforming inflation. Some of the largest names in the financial world are investors, including the likes of Warren Buffett, Carl Icahn and Peter Lynch.
The definition of a trader is a bit more complex. A trader periodically buys or sells assorted assets in order to generate profit from perceived inefficiencies in price. Some the most successful traders of the late 20th and early 21st centuries are Paul Tudor Jones, Steven Cohen and Richard Dennis.
Investing vs. Trading: Major Differences
Every individual has a unique reason for becoming active in the marketplace. Some people enter the financial arena looking to establish a career, while others are interested in preserving wealth gained elsewhere. Ultimately, this motivation dictates how a person engages the market.
There are three primary differences between investing and trading:
- Duration: The key distinction between investing and trading is duration. Duration is the length of time a position is left open in the market. Contrary to investing, trading is conducted using much shorter time frames. Intraday, daily and weekly timelines are used instead of the months, years or decades found in traditional investment models.
- Methodology: Investing is built upon many principles of classic finance, including fundamental analysis, diversification or “buy-and-hold” asset management philosophy. Conversely, trading is often dependent upon the implementation of technical analysis, high-frequency systems and assorted scalping practices.
- Frequency: Trading requires actively engaging the market on a regular basis to create revenue. In comparison, many investment plans are hands-off, ensuring relatively few transactions.
Both investing and trading are viable means of participating in financial markets. Given a proper strategy that allocates resources efficiently, both schools of thought provide avenues to pursue success in the marketplace.
Investing vs. Trading: Pros and Cons
Investing and trading each have both positive and negative attributes. Ultimately, it’s up to the aspiring trader or investor to decide which route is most suitable with respect to their available resources and financial goals.
A few of the advantages and disadvantages commonly attributed to investing are:
- Pros: Limited short-term liabilities, minimal transaction costs and potential tax breaks make investing an attractive endeavor.
- Cons: Availability of capital, reduced rates of return and market condition at maturity can place strain upon the investor.
Several strengths and weaknesses are typically associated with trading:
- Pros: Smaller capital requirements, substantial reduction of systemic risk and the potential for high periodic returns are several reasons individuals adopt an active trading approach.
- Cons: Impact of short-term volatility, increased capital gains taxation, and extreme competition can prove to be formidable barriers facing traders.
The futures markets are premier venues for aspiring traders and investors to achieve a wide range of unique financial goals. If you’re not sure which approach is ideal for your situation, check out the brokerage services suite at Daniels Trading. A free consultation with an experienced market professional is a great way to begin or enhance your journey into the marketplace.