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What are the Differences Between Investing and Trading?

July 3 2016 - Investing and trading may often be grouped together, but they are both different ways of attempting to profit from the financial markets. The goal of making investments is to gradually increase wealth over a long period of time by using the buying and holding of a portfolio of stocks, mutual funds, bonds and other methods of investment. Trading involves frequent, short-term buying and selling of stock and commodities such as currency pairs and other instruments with the goal of earning profitable returns which outperform traditional buy and hold investing. For example, whilst most investors may be satisfied with a 10% annual return, traders may seek to achieve this per month.

Investing: Long Term

With the trading side of things focusing mainly on the short term and relying on catalysts to increase or decrease stock value and therefore profits, investing is geared more towards the long-term side of things, with companies such as Fisher Investments providing long-term investment plans for their customers. When investing, it is not uncommon to see some short-term declines, but for the most part this is not a problem. When investing, the goal is to bank profits over the long term, with dips in value simply providing opportunity to buy more of the commodity in question - so long as you still believe in the reason you invested in it in the first place. While trading is all about taking the profit and running at the best possible opportunity, investing means sitting it out when the commodity rises in value as there will likely be more good news ahead for the company and more profits to be made.

Trading: Future Events

A key rule of trading is to only do so when you are certain that there is an upcoming future event which is predicted to drive the stock value of an organisation or entity higher. For example, the stock value of a biotech or pharmaceutical company may well be increased by the release of positive clinical trial data, or global events could affect the value of certain currencies on the Forex market. When trading, there are certain strategies which must be put in place - traders should take note of the news and use it to make an educated decision which will hopefully enable them to make a profit afterwards. This shows the difference between trading as a short term investment and investing as a long-term method of gaining wealth.

Which to Choose

If you are new to the world of investing and trading, it's important to know which you are going to choose in order to increase your financial gain. Knowledge on the subject is important - if you are knowledgeable about the stock market but have little idea about how to trade Forex, for example, you will naturally head over to the stock market for your first investment. Whilst there is money to be made from both, understanding yourself as a person and an investor will help you to make the right decision.

Don't get investing and trading confused - it could seriously hurt your portfolio!



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