This is the common question and also the greatest confusion among many people in regards to trading and investing. Most think that they are the same and don’t even bother of the differences. Some experts even debate on it. I hope to lay down a few key points so that we could see that they are very much different in reality. In fact, failure to recognise this difference is one of the reason of why many people loses money in the financial market.
Before we talk about the differences, let us talk about the common grounds between them. Both trading and investing are the act of injecting of capital into some asset classes such as stocks, derivatives, real estates or business for the purpose of financial profits. Both may seems to be doing the same in the eyes of public. However they differ in their mindset, risk management and also their entry and exit plans. Let us take for instance shares as an example to our illustration below. To investors, they actually view themselves as co-owners of the public listed company that they just invested. They would be interested in the business fundamentals such as sales, profits, costing and business model and strategies. They most probably would hold on to the investment as long as the initial reasons of why they invested remain. Traders or speculators in the other hand would treat the shares as the goods itself. They are buying the shares in the hope that someone will buy from them at a higher price in a near future. He most probably does not care about the company fundamental such as sales, products or profits. By the way, some traders do care of the company fundamental as they are employing hybrid analysis method into their evaluation. I will talk about that in some other posts. Let’s compare on some of the characteristics of both traders and investors:-
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Holding period.
Usually investors hold for longer term as business fundamental rarely change in a short period of time. Traders are normally holding for a shorter period of time. However, there are long term traders as well. In my opinion, holding period are a lousy indicator of their differences. This is where the general public got confused most of the time.
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Evaluation method.
Well informed investors will probably use some form of fundamental analysis to evalute the health and prospect of the company. Well informed traders or speculators will probably use some of technical analysis to evaluate the demand and supply ratio of the shares itself.
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Entry point.
Long-term investors welcome lower prices because they could add into their portfolio position. Traders in the other hand welcome a higher price as an indication that they are right on track.
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Exit point.
Investors would probably exit their position when the company are highly overvalued or there are some weakening to the business fundamentals. Traders would exit their position when they can confirm that the supplies are overwhelming the demands.
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Risk concern.
Changes of the business fundamental are most concerned risk for the investors. Market sentiment would be the most concerned risk for the traders.
I will talk more of trading and investing as they are the main themes of our discussion. As mentioned above, one of the reason of why general public losses a lot of money in financial market is because they are not clear of their objectives in the first place. They may have enter the market as traders or speculators. However, when the market turns against them, they would become unwilling investors as they would not want to sell of their losing position. Some investors are losing money and the opportunity to make a handsome profits when they abandon their investment when the market declining a little bit or when they are anxious after seeing their shares rises up quickly.
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