A guide to trading vs investing

This guide will explore how trading works compared to investing, with a focus on the implications of short-term vs long-term positions – helping you decide which strategy aligns with your goals.

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Trading vs investing: an overview

Both trading and investing share the same goal: to generate profit in financial markets – but they take different approaches. Trading focuses on short-term buying and selling using methods such as CFD trading, typically using leverage (also known as margin trading), with no ownership of the underlying asset.

This means trading involves taking positions over minutes, days, or weeks (or even seconds in the case of scalping), often using technical analysis. It’s high risk and can result in rapid gains or losses due to frequent market movements.

Investing, on the other hand, focuses on the goal of long-term price growth. Investors typically buy and own assets like shares, bonds, or real estate and hold them for years or even decades. The aim is to accumulate wealth through steady capital appreciation, dividends, or interest. Investors rely more on fundamental analysis, looking at the financial health and growth potential of an asset.

Both trading and investing offer ways to grow wealth, but they differ significantly in terms of risk management, techniques, and commitment. Understanding which approach suits your financial goals is important when devising a strategy for the markets.

Differences and similarities between trading and investing

Understanding the differences and similarities between trading and investing is important for your financial goals. These cover the use of leverage, degree of risk involved, and more. The table below looks into the distinctions to be aware of, ranging from the time horizon employed to analysis methods and degree of involvement.

Aspect	Trading	Investing	Overlap/shared elements
Ownership of asset	No	Yes	With investing you’ll own the physical asset such as a share. With trading you’ll speculate on the price movements of a derivative
Time horizon	Short-term: minutes to weeks	Long-term: months to decades	Both involve market participation and buying/selling assets
Goal	Quick, frequent profits from short-term price movements	Gradual wealth accumulation over time	The aim for both is financial profit
Risk level	Higher due to frequent trades, volatility, and potential leverage	Lower, but still affected by market downturns and volatility	Both require risk management
Strategy	Relies heavily on technical analysis (charts, indicators)	Focuses on fundamental analysis (company performance, economy)	Both use analysis, but with different methods
Frequency of trades	High: trades can happen multiple times per day	Low: typically fewer trades held for the long term	Both require strategic trade/timing decisions
Involvement	Requires active monitoring and quick decision-making	Typically passive, with less frequent portfolio adjustments	Both involve decision-making at key moments
Use of leverage	Common in trading (eg CFDs)	Rarely used in traditional investing	Both can involve leverage, but it’s more prevalent in trading
Risk of loss	Higher potential for rapid, significant losses due to market volatility and leverage	Lower potential for short-term loss, but risk still exists in downturns	Both carry the risk of financial loss, though trading tends to involve more frequent losses
Market knowledge	Requires extensive knowledge of short-term market indicators and trends	Relies more on understanding of long-term market fundamentals	Both require a strong understanding of market dynamics

Trading vs investing example

Here’s an example illustrating the difference between trading and investing, showing how the impact of factors such as leverage, duration of price moves, and volatility can impact the process and potential outcome for each position.

Trading example

You notice that Company X’s stock has been rising quickly in the last few days. Rather than buying the shares outright, you use a CFD on a trading platform, allowing you to speculate on the share price movements without owning the underlying asset. You research technical analysis and identify support and resistance levels based on historical price action. Based on your technical strategy, you open a leveraged position, buying 100 CFDs at $50 each. However, default leverage of 5:1 means you only need $1,000 to control this $5,000 position.

Within two days, the share price rises to $55. You sell your 100 CFDs at this new price, locking in a $500 profit (minus any additional charges and fees, such as overnight funding). This short-term strategy takes advantage of market volatility, and the use of leverage amplifies your gains. However, it’s important to note that leverage also increases the risk, as losses are magnified if the market moves against you. This means that if the share price falls to $45 instead of rising to $55, you would lose $500 (minus relevant fees) instead of profiting.

Investing example

You believe in the long-term price growth of Company X due to strong earnings and future prospects. Using a stockbroker, you buy 100 shares at $50 each for an outlay of $5,000, with the intention of holding the stock for several years. Over five years, the stock price gradually rises to $150, and you also earn annual dividends. After five years, you sell at $150 per share, earning a profit of $10,000, plus dividends collected during the holding period (and minus any additional fees). This strategy focuses on long-term capital appreciation and income from dividends.

As with trading, if the share price falls to $45 over this longer timeframe, you would lose $500 (minus relevant fees) instead of profiting.

Note: the below image content represents a hypothetical trade and is for illustrative purposes only to compare the features of trading and investing. Leverage is risky. Potential asset performance is not a reliable indicator of future results.

The differences between trading and investing in Company X

FAQs

Trading vs investing: which is more profitable?

Trading can potentially offer higher short-term profits due to frequent buying and selling, but it also carries higher risks and requires more active involvement. Investing, on the other hand, is typically more suited to the pursuit of long-term, steady price growth, with compounding returns over time. The profitability depends on the strategy, risk tolerance, and market conditions.

Trading vs investing: which is better?

Neither trading nor investing is inherently ‘better’ – it depends on your financial goals. Trading is ideal for those looking for short-term gains and who can manage higher risk, while investing is better for those seeking long-term wealth accumulation with a more passive approach. Your time commitment and risk tolerance are key factors in determining which is best for you.

Difference between trading and investing

Trading focuses on short-term buying and selling to profit from quick market movements, often using technical analysis. Investing is centred around long-term growth, typically holding assets for years to benefit from capital appreciation, dividends, or interest, and relies more on fundamental analysis.

Is trading harder than investing?

There’s no simple answer to whether trading is harder than investing, as both can present challenges depending on the situation. Trading often involves fast decision-making and short-term strategies, which can make it seem harder due to higher risks and frequent market monitoring. However, certain investment decisions, like evaluating a company's long-term prospects, can also be complex and time consuming. Ultimately, the difficulty depends on your strategy, risk tolerance, and timeframe.