Trading Versus Investing

Often when people are new to the financial markets, they get confused between investing and trading. After all, they both happen in the same place, and the goal of both is to make money. The truth is that they are really very different in the approach that you have to take.
 

Trading versus Investing

Investing is typically for the long-term. You invest in things that you think will go up in value, and that can include not just stocks and shares, but antiques, real estate, collectibles, gold, in fact anything that does not inevitably deteriorate and lose value. It is an excellent plan for everyone to have some investments, with the goal of protecting against inflation in the long-term as well as increasing in value over and above the rate of inflation. It is a good idea to diversify your investments, as this provides some protection from any particular item falling in worth. For the financial markets, investors would typically use fundamental analysis to identify areas of potential profit.

Trading on the other hand is typically short term and speculative, some would say risky. It takes place on the financial markets almost exclusively, although some people try and profit from trading or buying and selling goods through eBay and the Amazon marketplace.

When you are trading you concentrate on technical analysis, which uses recent price and trading volume figures to attempt to anticipate where the price will be going next. Bear in mind that the price at any particular time depends on the sentiment of the market and how the shares are regarded by the majority of market participants. This may be different from any underlying value they may have.

As such, trading requires study and skill so that you can identify the opportunities. With the practice of finding short-term gains, any money that you win that is more likely to come from a losing trader than to be a fundamental increase in value. This means that you must constantly be learning and applying your best judgment to determine which way to trade.

The advantage of trading is that you can achieve much greater gains than with investing, and can see results in a much shorter time. This also means that you can lose more quickly, if you do not apply the right strategies. Trading can take place on many different financial instruments, including the leveraged derivatives such as futures contracts and spread betting, which will multiply the rate at which you win or lose money.

It must be said that while investing is a wise thing for everyone, trading does not suit everybody. Some people find it hard to achieve the appropriate mindset required for trading, and you will find out as you look further into it that the psychology of trading is one of the most important factors determining whether you will profit. Trading is often referred to as more of an art than a science, and having a mathematical mind is not necessarily an advantage.

One difficulty with trading is that you inevitably suffer losses as well as gains. No one can predict exactly where the prices are going, so you must learn to live with the ebb and flow. One of the secrets of successful trading is making sure that, whenever you take out a trade, what you stand to gain if it is a winner exceeds the amount that you could to lose.

If you want to succeed at trading, you need to test the waters to see whether you can approach it in the right way. After the initial learning and study of technical analysis, a process that you should continue throughout your trading career, you can see whether you have a propensity for the craft by opening a free or “demo” account and practising. Only once you are comfortable that you have a winning strategy and can trade effectively should you risk real money in the markets.


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