Investing and Trading are two ‘almost’ synonymous terms but there are very fine differences between them, making a layman confuse between the two. Here’s an explanation that will end the confusion forever.
Why the confusion?
Investing and Trading creates confusion in people’s minds because they are similar on few terms.
- Trading is buying and selling of any financial instrument. Investing is also the same.
- A Trader trades, trade means buying and then selling, and an Investor also does the same which is making a trade. Then, does an investor become a trader by this logic?
Now, if a person is buying and selling any financial instrument to earn profits, how do we know if the person is a trader or an investor?
The distinct differences
- The biggest difference perhaps between the two is time. Time for what both investor and a trader buys and holds before selling are completely different.
- An investor will buy and then hold for years before selling them whereas a trader will buy and sell in matter of weeks, months or days and sometimes even hours.
- Since the time difference is that great, an investor aims to make huge profits off of a single trade. A trader on the other hand looks for small profits and then accumulate to increase wealth.
- A trader makes a lot of trades in a year, month or day. While, an investor makes very few in a year as compared to a trader.
- Well, if time is more, then obviously frequency will be less, since time is inversely proportional to frequency! Basic physics right? 🙂
- To earn profits a trader can buy low and sell high and also go short (selling high and buying low).
- An investor can use the basic buying low and selling high method because one cannot sell first and not buy for years.
- A trader uses technical analysis (based on the price movement and volume traded) to select the stock or any instrument to trade in.
- An investor uses fundamental analysis (analyzing instrument’s actual value and its future prospects) to select the investment.
- Lastly an investor and a trader differ on how their mind works. An ideal investor has to be patient enough to overlook the market’s fluctuations and hold to get profits.
- A trader on the other hand has to be quick to see the change in the market trend and make a trade at the right time.
So, in crude terms we can say that an investor is also a trader because the investor is also making trades. But as explained, the differences are too immense to not consider both investor and a trader as completely different and not same or even ‘almost’ synonymous.
An investor is a person who buys with a purpose of holding for a long term and then selling for a large profit while a trader is a person who buys, holds for a short term and sells for a quick, small profits.
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