Trading vs. Investing
While both investments and trading share a common goal of outperforming inflation and gaining profit through market participation, the similarities end here. Main differences between day trading and investing are position holding time frames and activity levels.
A shorter timeline means more focus on generating “an immediate and regular cash flow” through daily exposure to capital risk. Traders seek to gain maximum returns in single trading sessions. Price fluctuations allow to capitalize on short-term gains in trades that may take only a few seconds each to execute in hundreds of transactions in a single trading session.
An investment represents a pledge of capital to an asset to obtain a positive return at an undefined point in the future as a “buy and hold” strategy. Investments may take decades to mature, and investors readily accept that condition. Most investors execute transactions only a few times each year, basing decisions on long-term statements and portfolio positions.
Key Pros of Trading vs. Investing
|Assets can become more valuable over time as revenue from interest rates allows reinvestment.||Positions open and close rapidly, avoiding risks of a “total market collapse” through an active trading philosophy.|
|By “riding-out” tough markets instead of reacting to periodic volatility, investors limit risk with products that return value to an investment over time.||Traders who use leverage can risk smaller amounts of capital to gain profit.|
|Investors can avoid transaction costs by limiting the number that they choose to pursue.||A series of positive trades can build up a reserve of funds.|
|Investments may increase over time with unanticipated stock splits or dividend payments.||Protection from account drawdowns.|
Events happening while stock markets are closed may result in downside gaps and potential losses for day traders, while investing isn’t affected by this, considering it only a hiccup in a long-term perspective.
The ability to identify a low price depends on variables that present challenges. Technical indicators such as trade volume may provide some guidance, but many experts consider the practice risky. Other guidelines include analyst reports and consensus price targets that present an average of opinions from all analysts. Knowledge of how to determine when a stock price reaches its lowest point provides one of the most sought after aspects of investing.