FXCM Insights

What Is The Difference Between Trading And Investing?

In the financial markets of the world, there are a wide variety of participants each following a specified path to profit. However, among the millions of individuals actively engaged within a given marketplace at a given time, there are two distinct classifications of behaviour: trading and investing.

Investing is the act of pledging one’s own capital to an asset or group of assets that may produce a positive return sometime in the intermediate to distant future. Promoted by household names such as Warren Buffett, Charlie Munger and Benjamin Graham, investing commonly adheres to guidelines associated with assorted “buy-and-hold” strategies. The purchase of stocks, bonds, mutual funds or real estate with the goal of long-term capital appreciation are some of the most common forms of investing.

Conversely, trading is an active approach to the financial markets focused on creating an immediate and regular cash flow derived from capital risk. Through daily participation in a market (or markets), traders aim to maximise returns on a per-session basis. Trading operations often include many of the same securities used for investment, but may also include financial derivative products such as futures and options. Currency pairings on the forex are commonly targeted for active trading, because they provide pricing fluctuations that may be capitalised upon in the short-term.

The following are a few primary aspects of market behaviour that illustrate how investing and trading are philosophically opposed:

Investing: Pros And Cons

Investing serves as the traditional approach to financial markets, and is based upon the concept of creating wealth through “putting your money to work.” Implementing a capital management approach based upon the tenets of investing affords the individual several advantages:

However, investing also has several drawbacks:

Trading: Pros And Cons

In contrast to investing, trading methodologies are based upon creating revenue in the short term. Periodic fluctuations in the value of a financial instrument are often seen by traders as the preferred avenue for achieving profit. Swing traders, day traders and scalpers all practice methodology akin to short-term trading.

Active trading affords several advantages to its participants:

However, in the current digital marketplace, there are several drawbacks to implementing an approach based solely upon active trading:

Summary

Although the ultimate goal of both trading and investing is to ensure profit through outperforming inflation and the market itself, the processes surrounding each discipline are often at odds. The primary differences between trading and investing lie in how each approach views and conducts market-based transactions.

It is important to realise that neither an active trading methodology nor a long-term investment strategy is the definitive correct answer. Each discipline has numerous pros and cons, and it is ultimately up to the individual to decide which approach is best given capital and risk constraints.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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