The Difference Between Trading And Investing

When looking at forex broker promotions on various social media platforms, they often claim forex is an investment. It is as if the services offered to us are investment services. Even though there is a clear difference between trading and investing, even if the transaction mechanism is the same.

This misunderstanding is quite dangerous if it is not straightened out. There were even many people who were interested in signing up for binary options a while ago because the platform offers "investment", even though it is not an investment platform. As a result, many people suffered losses and no one was held responsible.

In this article, let's discuss what trading is and what is investing to find the difference between them.

Definition of Trading and Investment

Trading is the activity of buying and selling goods to make a profit. Trading in the financial market is identical to forex, but actually trading can be done on almost all financial market instruments, for example stocks, crypto, bonds, derivatives and so on.

Trading is carried out by taking advantage of price movements in the short term. Even swing traders who claim to be long-term traders are still categorized as short-term trades. Meanwhile, investments are made in years or decades.

Investment is understood as the activity of buying assets with good prospects in the future. A good prospect means that the asset will probably grow many times over so that it provides a huge profit for investors who buy it now.

Basically, the purpose of investing and trading is the same, that is, to make a profit. However, the priority of investment activities is not only the profit, but also the risk given to investors. For this reason, investors do not invest for significant profits, but precisely for the safety of their wealth assets.

For example, during an economic crisis, investors usually flock to shift their portfolios to safe haven assets, such as gold, government bonds, and others.

Difference between Trading and Investment

Just knowing the definitions of trading and investing may not be enough to find differences. Because both of them are buying and selling assets. And in general, both activities are carried out for profit. So, what's the difference?

There are at least 6 things that we can use to distinguish between trading and investing.

1. Holding period

Holding period is the duration for which an investor or trader owns the asset (before selling it).

Traders have a short holding period of between a few hours until at most it may be yearly, but it is rare.

While investors have a longer holding period than traders. Generally, it starts from one year to even decades. Although later there are several investment products that offer short-term investments, ranging from 30 days to 12 months.

2. Asset Risk

Assets come with different types of risks. There are low, medium and high.

Most trading activities are carried out on high-risk assets. Usually in markets with higher volatility than other financial markets, so in the short term it can provide sufficient profits. Examples include the stock market, forex market and cryptocurrencies.

Meanwhile, investments are made in assets with relatively low risk. Some investment products are categorized as risky assets, but compared to trading, investment risk is much lower.

For example, trading stocks with stock investments has a significant difference in risk. Stock traders usually look for stocks that have a wide range of price movements. And generally these stocks have a small market capitalization, compared to other types of stocks. Therefore, the range of price movement becomes wider due to its high volatility.

While stock investments are made in stocks that have high liquidity, are widely traded, the fundamentals are good, the management of the company is good and other factors that indicate that the stock is low risk. For example, blue chip stocks, stocks with high liquidity, large market capitalization and excellent financial condition.

3. Method

There are many types of trading methods that are actually adopted from investment methods. Although in the end a little bit is profitable.

The trading method generally uses the method of technical analysis, i.e. using a history of price movements or past patterns of price movement. Examples include candlestick pattern, chart pattern, Elliot wave, harmonic pattern and others.

Meanwhile, investment uses fundamental analysis, which is data that affects the movement of assets. For example, in the stock market, investors use a certain ratio calculated from the data obtained in the financial statements provided by the company.

4. Types of transactions

In forex trading, transactions are not only in the form of buying transactions, but also selling transactions and can still generate profits. But not all financial markets are like that, most sell transactions are only carried out when you want to take profit.

In trading, traders can make two types of buy and sell transactions to make a profit. Even if it is in a stock market that only provides one-way transactions. Sell transactions or what is usually called short selling can also be done in the stock market using a margin trading mechanism. But, the impact is considered negative on the stock market, as it can aggravate the ongoing bearish trend and may even cause crashes.

Meanwhile, in short selling investments, it is only done when investors want to cut losses or take profits. In addition, short selling using margin trading is not suitable for long-term transactions because it is risky. Therefore, in stock investment and even other investments there is no short selling facility.

5. Purpose

The purpose of trading and investment is indeed both to make a profit. However, there is a difference between the goals of the trader and the investor.

Trading is identified as a business, therefore trading can be used as a profession where traders seek income from the activity. Therefore, there is the term trading for living, which is when the trader becomes a profession and the main source of income.

Meanwhile, investment is identified as an activity of managing money and not as a profession that is a source of income. Investment becomes a side activity outside of the main job. Although there are some people whose activities are only investing, for example Warrent Buffet, but because he is a large investor where the proportion of ownership of shares of a company does not cover 1% or 2% only, but dozens to tens of percent, so that the return on investment can be to cover the cost of living.

Conclusion

The mechanisms and instruments in trading and investing are more or less the same. But, trading and investing are obviously different in many ways. Like the 5 things above that show the difference between trading and investing. So, don't mistake trading as an investment or an investment as trading because the two are different, especially in terms of risk. You can lose big just because you think trading is the same as investing or vice versa. 5 differences between trading and investing