Trading and investing may seem similar, but they are two different ways of accessing the financial markets. Each has its advantages and disadvantages, but whether or not you should proceed with one over the other depends on your financial situation. Both platforms have been around for years, and one could expect feasible returns depending on the investment type and strategy.
Here are three key differences between traders and investors:
1. Investment Timespan
Both investors and traders are seeking profits through the acquisition of stocks, bonds, mutual funds, or other investment instruments. The gain can either be long-term or short-term. For an investor, the profit is acquired by holding on to the investment for a longer period of time. An investor is interested in the long-term benefits of the investment rather than short-term gains. In a fluctuating market, an investor will ride out upward and downward trends. As a result, investors often reap long-term benefits like stock splits, dividends, and interest.
For the trader, their investing approach is fast gains within the least amount of time. Transactions are a bit more frequent. The ultimate goal is to generate returns that exceed the buy-and-hold method. Whereas an investor may invest in a particular stock for years or decades, a trader may hold the same commodity for no more than a day. The trader attempts to use the fluctuation of the stock market to their advantage by buying and selling stocks at profitable times.
2. Risk Level
As with all investments, there are risks. Traders have the potential to gain higher profits within shorter amounts of time, but they also risk losing capital should the market fluctuate against their predictions. They’re also limited in terms of stock options because they need capital that can liquidate quickly. Although many traders are technically savvy and have tools for high probability trading, it still has an applied risk that’s greater than long term investing.
Another disadvantage of trading is that it’s difficult to deploy more capital for investments. The trading process is not only time-consuming in terms of research and the constant monitoring of the stock market, but it also involves a great deal of capital that may be hard to recover should a loss occur.
3. The Cost
Unlike many investors, traders are subjected to capital gains tax. This doesn’t mean that investors are subjected to the same tax because it’s possible, depending on the scenario. Long-term investments can provide unique gains depending on how a company operates. Capital gains tax is applied to all capital gains that are the result of buying and selling stocks. Short-term capital gains tax can range anywhere from 10% to 37%.
In conclusion, both methods are viable options for creating long-term wealth. However, trading involves more time, skill, and capital for successful returns. Investing does not require as much time and monitoring of the stock market. Choosing the best method for investing depends on your personal goals. All investments are risky, but you can minimize risk depending on your investment strategy.