The main differences and similarities of trading and investing
Investing and trading are getting ever more recognition by retail and inexperienced people who do not have skills or education in the markets. There are several differences between investing and trading, just like there are many similarities, which is something that today’s article will explore.
What are the main differences?
First of all, investing and trading are both mostly about making money. In both cases, the people who are entering some capital into positions, whether for a scalp trading or a decade long investing, do so mainly with the vision that they can increase their wealth and the size of their investment. However, their strategy, attitude, information channels or time frames differ vastly from the way they do it.
1. Time frame
One of the most significant differences between the investor and trader is the timeframe they use. While investors primarily focus on long-term investing and holding it over several years, if not decades, traders are getting in and out of the market much faster.
There are several types of traders based on the time frame. Scalpers are traders who use the shortest time frame. They try to take advantage of the small price changes, and they make it by fast profit-taking. They rarely hold a position for longer than a few minutes.
Then there are intraday traders who permanently end their trading days with closed positions. They are only trading within one day. They stay in the positions anywhere from a couple of minutes to several hours. There are also swing traders, who are usually in the trades for a few days, rarely weeks. But they are not going in and out of a position, like scalpers and intraday traders, within one day.
Closest to the investors are position traders. They usually mostly base their strategies around macroeconomic events, trends, and the growth potential of the asset or index. Some of them do not enter more than ten trades a year. While it looks like they might just be defined as investors, traders usually have their clear money management and risk management strategy for their exits. They also close their positions within weeks or months from entering it and never have a strategy of buy-and-hold.
Investors, on the other hand, stay in their positions for years or even decades. They rarely look at the recent price action and try to take advantage of that. Instead, they spend their time evaluating the market trends and staying in them for a long time. Some of them are looking not even at investing within a time period of years but decades.
2. Strategies connected to profits
Hand in hand with the time frames are connected the differences between the strategies that both parties take and how they manage their positions and trades. While traders, depending on their time frame, will mostly look at profits in terms of single to double-digit gains from their trades, investors will want to double, triple, or quadruple their investments.
Due to their long-time frame preferences, they would want to multiply their capital or investment manifold over the years. While, in the long run, the traders will have the same goal, they will try to accomplish them by smaller, much more frequent profit takings.
3. Focusing on different information
Traders and investors are also following different news, information, or data, which they then use for accessing their strategies. Traders are mostly looking at the price fluctuations data feed connected to volumes of trades. They use tools like technical analysis, where they look for information on important price levels, supports, and resistances or trends.
They use different trendlines, indicators, or tools. Then they apply this information to their strategies, which often serve as an essential level for their entries to the positions, stop losses or take profits. They also analyze the current news, breaking events, or geopolitical tensions just like we can see now. They also look at the sentiment that the markets are in, as they mostly try to follow the trends.
Let’s look at cryptocurrencies, for example. The traders of cryptocurrencies will look at different types of information from the price of Bitcoin, its dominance in the market, the overall situation in the stock markets, with which crypto is closely correlated or breaking news connected to the given cryptocurrency. They can also analyze upcoming events and news releases connected to the cryptocurrency using tools like CoinMarketCal.
While some of this information might also be helpful to the investors, their strategies are based on entirely different kinds of information. They analyze the macroeconomic events, the influence of central banks on the overall economy, fundamental analysis, sector analysis and many more.
But mostly, investors are trying to look for undervalued companies, assets, or indices and invest capital where they feel the overall world, sector, or industry is heading. Let’s look at cryptocurrencies again. Investors into cryptocurrencies base most of their decisions on the fundamentals of the cryptocurrency, assess its competitors, or the overall capitalization of the cryptocurrency.
Investors would also compare the team, its vision, and credibility or the value that the crypto will bring into the market. Also, they can look at what the given cryptocurrency will try to bring to its users. Most of these are found usually in a whitepaper, which is a document describing the cryptocurrency and the most crucial information about it.
There are obviously many other differences that go beyond the scope of this article. Some of them include financial tools that both parties use, their attitude towards taxes, dividends, or passive income, or the fact that while investors are not shorting the market, the traders often do. But, not everything about investing and trading needs to be thought of as different.
Not all about differences
While it might look right now that investing and trading are vastly different, they have many similarities at their core. Let’s thus also look at some points where people can see how investing, and trading are similar to each other.
1. Increasing capital and wealth
One of the most significant similarities between investors and traders is their primary goal. Both of these entities are always trying to maximize their capital or the wealth of their investors, customers or clients.
There might be a slight difference in the fact that while traders often live off of their profits, investors are primarily concerned with long-term capital building. But their main goal is still the same.
2. Risk and money management
Investors, just like traders, need to take care of the risks they undergo by entering their positions. While these positions can be vastly different from the standpoint of the time, both must be very careful about the size of the risk they undergo.
The same applies to money management, where investors and traders need to make sure not to invest too much into any single position or be too exposed to some sector or asset. Additionally, money management is critical also from the standpoint of diversification. While investors need to be much more critical about how they diversify their investment as such, traders need to diversify mostly their knowledge since they need to understand how different financial assets or markets can affect the asset they are trading.
3. Psychology and professional attitude
While anyone can invest and thus take care of their future, not everyone can just sit at a chart and trader. But, when we talk about investors and traders as professionals, it is essential to mention that these need to be taken as serious job positions.
Professional traders, as well as investors, take years to experience markets in different cycles and how they react to different events, occasions, or seasons. They also need to analyze and understand themselves and know how their psychology affects how they respond in the markets. Just like in any other profession, traders and investors learn constantly to improve their results.
Cryptocurrencies and investing and trading
Cryptocurrencies, just like any other financial asset, are subject to both traders and investors. With the market still really young, most of the traders and investors mainly were from retail. Yet, especially in the last two years, more and more institutions have entered this world and are now investing and trading assets such as Bitcoin, Ethereum, Cardano, or Binance Coin.
With the daily volumes of trades as well as trading value gradually rising and cryptocurrencies becoming ever-more crucial in the financial world, the market will progress, and more and more professionals and institutions will enter. With this, the work of investors and traders will be more important in connection with cryptocurrencies than ever before.
Investing and trading have many differences as well as similarities. These two disciplines are closely related to financial markets and are also getting more traction in the cryptocurrency market. If you want to know more about how CRYPTO INVESTMENT approaches its products and services, which are closely related to investing and trading in the cryptocurrency sector, feel free to contact us.