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Investing and trading share a lot of similarities, yet the strategies behind them are quite different. The most considerable difference is the holding time frame. An investor may hold stocks for more than 30 years, while a day trader might hold them for just 30 seconds.
Both investors and traders want to make a profit in the financial markets. At times the methodology is the same. Investors wait for large moves in the market and seek higher returns. Traders take advantage of short-term fluctuations and make smaller, more recurrent profits.
Investing is a buy-and-hold approach. The minimum holding time frame is generally five years. It is common for investors to diversify their portfolios to better ride out market movements.
Diversification reduces risk and fosters more balanced returns. Investors with higher risk tolerance and conviction may choose to concentrate on just a few stocks to make more significant profits.
Pros of Investing
Investing does not require daily study of the markets and can be accomplished passively. Dollar-cost averaging is a popular method of investing that allows you to invest your money consistently. With dollar-cost averaging, you buy stocks while they are down and up, which averages your cost basis.
Investing allows more time to focus on other aspects of your life while your portfolio steadily grows each day. Short-term movements do not have any effect on a long-term investor as markets generally rise over the years.
Cons of Investing
Investing is not going to replace your 9-5 job or make you a monumental amount of money in the near term. Holding stocks for years takes patience and the willpower not to sell during downturns.
If you choose to concentrate on a few stocks, you could end up with a loss even after holding for decades. Diversified investing reduces risk but results in more meager returns. If your portfolio underperforms and your holding period ends during a bear market, you may even lose money.
A trader may buy and sell only during the trading day, which is known as day trading. Scalping is day trading with a timeframe of only minutes or seconds. Swing trading is holding for more than one day up to months. A position trader holds for months to a few years and is nearly an investor.
Traders focus on short-term movements and seek to consistently make small profits which add up to a large amount.
Pros of Trading
Trading can turn into a full-time job if done successfully. An experienced trader can make more money than some of the highest paying careers. Trading allows you to work for yourself and have the freedom to determine your own income.
A trader can capitalize on short-term trends and make massive returns in a small period of time. Trading allows you to enter and exit positions without having to stick with them for years and years.
Cons of Trading
Trading is not easy, and most people are better off investing in index funds. You might have five profitable months then end up erasing all your gains in a week or less. The emotional stamina needed to trade is hard to develop.
Many traders turn into gamblers as the thrill of going all in and taking on too much risk gets addicting.
Traders don’t get the benefit of riding out long-term market fluctuations. You can miss out on huge returns that only develop over years of holding. The power of compounding is a great way to build wealth, and trading doesn’t have that advantage.
Which Is Better?
Investing is better than trading. There I said it. Investing takes less work, has more advantages, and is statically more profitable than the average trader’s return. Unless you have extraordinary skill, emotional control, capital, and time, then you’re likely better off with investing.
If you have the right capabilities and can dedicate enough time to trade, it’s much more rewarding than long-term investing. The great news is that you don’t have to pick one or the other. Investing 90% of your capital and using the other 10% to trade can increase your market knowledge and returns.
“If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.”Warren Buffett
Obviously, Mr. Buffett is not a short-term trader, and that is likely a good thing. His strategy has worked very well for him. That is what it comes down to. Identify what method works well for you and capitalize on it. You will have to try different approaches, and you might not figure out what works best for you overnight.
I always found it funny how long-term investors look down on day traders. Usually, it’s because they’re jealous during times where high-risk stocks are going sky-high. The fear of missing out can tempt even the most conservative investors.
In the end, traders and investors are just trying to create wealth in the market. Both can be done, and both are admirable approaches. No reason to hate on a type of strategy only because you’re not good at it.