According to BursaMalaysia, 23% of their active trading accounts belong to millennials, showing that many young people understand the value of investing. However, many of you might have been wondering: trading vs investing—which is the right one for me?
Generally, traders take advantage of market fluctuations to enter and exit the market quickly. The aim is to take smaller profits more frequently. On the contrary, investors buy and hold to gain returns over an extended period. To understand trading vs investing better, here is a list:
Investing
The goal of trading vs investing is to build wealth gradually. However, investments are held over a long time. Rather than relying on your buying and selling skills, your long-term return is based on the business performance that year. If the long-term trajectory is on track, you will not need to worry about daily stock price fluctuations.
Trading
a. Fast and frequent transactions
Trading involves fast and frequent buying and selling of stocks and commodities. Traders prefer to have monthly returns than investors who receive annual returns. In the end, getting returns that outperform investments is the aim of trading.
b. Technical analysis tools
Traders employ technical analysis tools to find high-probability trading setups, one of which is oscillators. Technical analysts will interpret a trend indicator made by oscillators that shows high and low bands between two extreme values. This information will indicate that the asset is overbought when it approaches the extreme upper value or oversold at the lower value.
Differences
a. Investment time frame
Based on the time frame, we can see trading vs investing as taking action vs waiting. To capitalize on volatility, traders and speculators will examine rising and falling markets over a shorter period. On the other hand, investors will examine markets over an extended period, determining a company’s long-term viability and growth potential.
b. The initial capital required
A small initial leverage deposit would be required to access the trading market fully. For example, if you need to deposit RM5,000 for five shares at RM1,000 each, you might have to spend RM1,000 (20%) to open the position. Due to this, margin trading is another name for leveraged trading. This deposit is stated as a proportion of your overall trade.
For investing, you need to spend the total amount of trade. So if you want to buy five shares at RM1,000 each, you need to pay RM5,000 immediately to open the position, with no additional account costs. Also, there are investment opportunities with much lower entrance fees compared to conventional trading thresholds.
c. ROI – Return on investment
Trading vs investing have different ROIs. Many factors contribute to the way your ROI is granted. Strategy, ways to manage risk, and the initial quantity of capital you invest are just some factors to consider. With Investing, these factors are somewhat passive and contribute to your decision-making before you even consider putting down a deposit for investment. Typically, once an investor has completed the position by selling the relevant asset, they will receive their return on investment. Sometimes the return is delayed, but more often than not a profit is earned.
With trading, the same factors are more active. Your decision-making process is cut into a fairly small window of opportunity, and leverage is added into the mix. Any gains will increase when trading with leverage. It increases your risk of losing an ROI while potentially allowing you a much larger profit with the right trade.
d. Cost of trading vs investing
Besides the initial capital, trading vs investing might have additional costs. If you are using a broker, remember that their fees can significantly reduce your earnings. Before settling for a broker, compare different brokers. Make sure that you get the best value for your money.
Meanwhile, trading may come with unexpected costs. There are overnight financing costs, guaranteed stop premiums, or maintenance margin fees. In the long run, these costs can make trading less profitable for most traders than adhering to an investing strategy.
e. Risks
Trading vs investing will always have risks, no matter the method. When you invest, your risk is restricted to the asset’s purchasing price or equity risk. When trading, if you decide to do leverage trading, it can increase your earnings, but it can also increase losses. That’s why you need to know how to manage your risks.
f. Methods
There are two methods to invest:
Passive Investing: A buy-and-hold strategy depends on the underlying companies’ basic performance to increase returns. This method uses benchmark funds, such as ETFs and mutual funds, which will imitate the underlying asset’s returns. As a result, when you place a bet, you intend to retain it for a time rather than quickly sell it.
Active Investing: This method requires a more hands-on approach, so many investors opt to engage a fund manager who makes the majority of the decisions on their behalf. By entering and exiting the market at good moments, active investors will try to outperform the market.
For trading, you will usually have to consider the frequency and duration of your trades, risk tolerance, trading time availability, personality, and account size. If investors will consider companies’ business performance, outwitting the next trader is the key to having successful trading.
The rules of trading vs investing may differ, but the benefits of learning both mean a diversified investment portfolio. So, consider them both when starting your investment journey.