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Key Differences Between Trading vs. Investing

Updated: Mar 15, 2019

Understanding the Differences.

While both approaches to accumulating wealth on the market involve executing financial transactions, the similarities end there.


Investing

An investment represents a pledge of capital to an asset to obtain a positive return at an undefined point in the future as a “buy and hold” strategy. Investments may take decades to mature, and investors readily accept that condition. Most investors execute transactions only a few times each year, basing decisions over a long timeline. A return of more than 6% on capital generally meets investors’ expectations

Trading

Working on a shorter timeline than investors choose, traders focus on generating “an immediate and regular cash flow” through daily exposure to capital risk. Traders seek to gain maximum returns in single trading sessions. While traders may select some of the same securities that investors choose, they may also prefer derivative products as well. Price fluctuations allow traders to capitalize on short-term gains in trades that may take only a few seconds each to execute in hundreds of transactions in a single trading session. Traders expect a gain of 10% each month.

Considering the Pros and Cons of Investing

The differences between trading and investing pose no challenge for the advocates of each. They know which approach suits their preferences, as well as the advantages and disadvantages, and it cannot dissuade them. Even so, they evaluate the plus and minus aspects as they find ways to make their money work for them


Knowing When to Sell Stocks for Short-term Profit

The stock market offers some guidelines that become easy-to-remember slogans such as “buy low and sell high.” Market performance shows that Investments become worth more than the purchase price over the long run of at least 10 years. When an investment becomes worth more than an investor initially set as an exit point, it needs to go. A requirement for cash can motivate an investor to liquidate an asset and invest elsewhere, a good reason for selling. In some cases, an investor may want to re balance a portfolio by taking short-term profits on a stock that performed well.


Focusing on Stock Share Prices for Long-term Gains

The slogan that guides a decision to sell stock shares applies as well to buying them. However, the ability to identify a low price depends on variables that present challenges. Technical indicators such as trade volume may provide some guidance, but many experts consider the practice risky. Other guidelines include analyst reports and consensus price targets that present an average of opinions from all analysts. Knowledge of how to determine when a stock price reaches its lowest point provides one of the most sought after aspects of investing.

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