Trading and investing are both ways of speculating on market prices in an attempt to make money. Hence, they are often mixed up. Yet, there is a principal difference between them.
Trading typically refers to speculating on short-term market movements to capture a quick gain (and may result in a quick loss too). Investing, on the other hand, usually involves holding assets long-term to capitalise on continuing trends.
The trading vs investing debate has been a long-standing one in the financial markets. In this guide, we examine some of the features of both strategies, and explain the key differences between trading and investing. With varying approaches to risk and reward, these two strategies offer different paths for potential financial gain.
Trading is the act of speculating on short-term market movements to capture a quick gain.
Investing involves holding assets long-term to capitalise on continuing trends. It can, of course, result in losses too.
The key differences between trading and investing are in their timeframes, goals and liquidity requirements.
Investing always involves ownership of the underlying asset and may pay dividends.
Trading derivatives allows to open short positions and use leverage, which magnifies profits and losses, yet does not involve ownership of the underlying asset.
What is trading?
Trading involves buying and selling assets or financial derivatives such as contracts for difference (CFDs) to speculate on short-term price fluctuations. Trading some derivatives (such as CFDs) may allow you to open a short position and use leverage, which can multiply both profits and losses.
Leverage can be compared to a magnifying glass: it can increase the size of your profits, but also losses.
Some of the types of trading include, but are not limited to:
- Day trading: This is trading over the course of a day, opening and closing a position within the same market session. Day traders typically use technical analysis.
- Swing trading: This involves traders aiming to speculate on short-to medium-term price trends that could last from one day to several weeks. Swing traders tend to rely on technical analysis.
- News trading: Traders who follow this approach focus on fundamental analysis and examine various market-moving news, such as earnings reports, mergers and acquisitions, economic data releases and central banks’ meetings, which can affect an asset’s price.
What is investing?
Investing is based around buying assets, such as company stocks, bonds, commodities, and other asset classes, and holding them in expectation that their value will increase over time. Investing is seen as a long-term strategy, with investments often held for a number of years.
Investing is often metaphorically compared to growing a plant: it requires time and patience.
Some types of investing include, but are not limited to:
Value investing: Involves assessing the valuation of an asset and whether it is undervalued or overvalued to buy the so-called value stocks.
Growth investing: Involves targeting growth stocks, companies that are known for generating revenue and profits faster than the industry average.
Income investing: Buying assets that could generate income without selling them, for instance, through shareholder dividends.
Differences between investing and trading
|Goals||Short-term profits||Longer-term profits|
|Risk||Higher risk||Can have less risk, but is still inherently risky|
|Return generation||Buying and selling assets||Can also involve shareholder dividends|
|Liquidity||Requires high liquidity||Less likely to require high liquidity, although some liquidity is needed|
|Ownership of the asset||Not in case of derivatives||Yes|
|Going short||Allowed with some derivatives||Only through selling assets or inverse exchange traded funds (ETFs)|
|Leverage||Allowed with some derivatives||Only through leveraged ETFs|
Timescale & Goals: Investors buy their assets and then hold onto them for a long time, cashing in, in many cases, many years down the line. Hence an investor’s goals are typically long-term profits. Trading, on the other hand, is a more short-term activity. A trader will not only evaluate what to buy or sell, but when to buy or sell it. The idea is to try to make a profit in a relatively short space of time.
Risk: Due to its long-term nature, investing may allow market participants to ride out short-lived high volatility and bear markets. Traders, on the other hand, could risk losing out more and sooner because they operate in a shorter space of time. Nevertheless, that does not mean that investing is without risk, as there is always the possibility of losing money.
Returns: Traders aim to generate income through buying and selling assets or financial derivatives in the short-term. Investors have other opportunities for income, for example through shareholder dividends.
Liquidity: Traders require a higher degree of liquidity to enable them to quickly enter and exit positions. On the other hand, investors may not require the same level of liquidity as traders since they are not necessarily looking to make frequent trades or enter and exit positions quickly.
Ownership of the asset: Investing typically involves ownership of the underlying asset, for example company shares. Trading, on the other hand, may involve buying and selling derivatives, such as future contracts or CFDs.
Going short: Some derivatives, such as CFDs, offer traders to open a short position, speculating on an instrument’s price to fall. In investing, however, going short can only be done through selling the asset if you already own it, or through inverse exchange-traded funds (ETFs).
Leverage: With CFDs, traders can also use leverage, which allows them to open bigger positions with less capital. For example, with 2:1 leverage, traders can buy $1,000 worth of CFDs with only a $500 payment. This involves more risk, as leverage magnifies both profits and losses. In investing, leverage is only available through leveraged ETFs.
Trading vs investing examples
Both trading and investing can lead to profits, but also losses, depending on a range of unpredictable variables. Below, we look at some examples of how each approach may have led to different scenarios.
Remember, however, that past performance is not a guarantee of future returns.
Credit Suisse (CS)
Credit Suisse (CS) has seen its share price collapse over the years, as the troubled bank struggled with scandals, losses and liquidity problems. Between 2013 and 2023 the bank’s stock slumped by over 86%. The loss goes as high as 95% from when the share price peaked in 2007.
Hence, investors who have bought a £1,000 worth of CS shares in 2013 and kept them, would have lost £860 in ten years of holding them (dividends excluded). Those who invested during the all-time high levels would have lost £950.
Traders, on the contrary, could have profitably shorted the stock of the bank on numerous occasions. For example, on 20 March 2023, the CS share price fell by 52% amid the banking turmoil that saw rival UBS (UBSG) takeover the troubled bank. But, of course, they could have equally gone long when the stock was falling, and would have lost money, too.
Credit Suisse (CS) live stock price
Amazon (AMZN) was founded as an online book shop in 1994, and operated from its founder’s Jeff Bezos garage in its early days. Although Amazon debuted on the NASDAQ Stock Exchange in 1995, it didn’t turn profit until 2001, amid the bursting of the dot-com bubble.
The now tech giant’s share price has grown 528% between 2003 and 2023, buoyed by the business expansion and a line of product launches such as Amazon Prime and Amazon Kindle in 2007, and Echo & Alexa in 2014.
An investor who bought £1,000 worth AMZN shares in 2003, would have it grown into £5,280 in 20 years, excluding any dividend payments. This figure is adjusted for four stock splits the company has undergone to make shares more affordable for retail investors.
Amazon (AMZN) live stock price
Note that past performance is not a guarantee of future returns. You should always do your own research before choosing to trade or invest in any financial instrument.
Trading vs investing: Which one to choose
Whether you should choose investing or trading would depend on a number of circumstances, such as your risk tolerance, objectives and how much time and money you are willing to commit.
Quicker returns: Trading could offer the potential for high returns in a short amount of time, especially in volatile markets and with the use of leverage. This could be attractive to those with higher risk appetite. Note that trading involves high risk and can result in quick losses too, and leverage magnifies both profits and losses.
Hedging: With some derivatives such as CFDs traders could open a short position to hedge against long positions in the same asset.
Flexibility: In the days of technological advancement, trading can be done from anywhere with an internet connection, allowing for greater flexibility.
Long-term returns: Investing provides an opportunity for long-term growth, as the value of investments can appreciate over time. Note that there is also a risk of a loss.
Diversification: Investing in a variety of asset classes, such as stocks, bonds, and real estate, could help diversify and reduce the impact of market volatility on the overall portfolio performance.
Passive income: Certain types of investments, such as dividend-paying stocks, could generate passive income streams.
Trading and investing both involve speculating on the markets to earn money, yet the former is for short-term gain and the latter focuses on long-term wealth generation.
Trading could be higher risk, especially when using leverage, which magnifies both profits and losses. It also requires more liquidity, may not involve ownership of the asset and in some cases, such as derivatives trading, allows going short, which could be helpful in hedging strategies.
Investing, on the other hand, involves ownership of the asset and may require less liquidity due to the smaller volume of trades. Shareholder dividends allow investors to earn additional returns. Investors could go short only through selling assets they already have, or via inverse ETFs. Leveraged ETFs are also available for investors.
Which strategy is more appropriate for you would vary depending on a range of factors, such as risk tolerance, prior experience in the markets, and whether you favour the fast-paced world of trading or the long-term approach of investing.
Make sure to always conduct your own research, looking at the latest news, analysis and market commentary. Remember that markets can move against you, and never trade or invest more money than you can afford to lose.
Are trading and investing the same thing?
No. Trading refers to speculating on short-term market movements in an attempt to capture a quick gain. Investing, on the other hand, involves holding assets long-term in an attempt to capitalise on continuing trends.
How to learn about trading and investing?
To learn about trading and investing you should carry out your own research, looking at reputable publications and analyst reports, studying the basics of technical and fundamental analysis, and reading market news.
Which is more profitable, trading or investing?
It all depends on what you are trading or investing, when you trade or invest, and how much work and research you are willing to put in when either trading or investing. Note that both endeavours involve risk of a loss.
Can you trade and invest in the same types of assets?
In theory, yes. For example, you can invest in a stock and open a trading position in a stock CFD.