The 6 Key Differences Between Trading and Investing You Need To Know About

It is now 2017 nearing 2018 where majority with an electronic device can easily gain access to the securities market without stepping out of their house.

With investing and trading made easy with advancement of technology, this article breaks down the key differences between the two whilst keeping terminologies as simple as possible.

TL;DR – Key differences between Investing and Trading

How does it work?

• In investing, one usually buys a security and holds it for a long-term before selling them
• In trading, one may either buy the security first before selling or sell the security first before buying (also known as shorting).

Strategies

You should not be investing or trading if you do not have a plan or strategy. This will expose you to unnecessary risk.

• In investing, the strategy is usually less technical where one adopts the buy and hold strategy
• In trading there are several strategies such as making a scalp, putting on a day trade, swing trade and even seasonal trades.

Duration

The timeframe is important as it requires patience when you are holding onto a position and different people may have a different threshold.

• In investing, one usually hold for a long-term
• In trading, one may execute a trade which lasts from seconds to months.

Profitable Direction(s)

• Investors usually make money when the market goes up
• When it comes to trading, traders can profit or suffer a loss even when the market goes down or goes sideways (up and down cycle) depending on their position.

Source of profits

When you have executed a transaction, it is also important to understand where and how you are making a profit (or a loss).

• In investing, one is able to make a profit when the security increases in value (capital gains) and also draw dividends from it when it is held for a long term.
• In trading, the source of profit comes from the spread which is the difference between the Ask price (the price you are buying into) and the Bid price (the price you are selling).

Books that can help

Below are some books which I believe will be of a help:

• Books on investing include:
  Common sense in mutual funds by John Bogle
  Secrets of Millionaire Investors by Adam Khoo
• Books on trading include:
  A Beginner’s Guide to Day Trading Online by Toni Turner
  Secret Psychology of Millionaire Traders by Conrad Alvin Lim

Editor’s note: All those books listed above are available from the Business and Finance Section at your nearest library. You can utilize the online search function to check for availability of books at http://search.nlb.gov.sg/

If borrowing of books is not really your thing, you can always purchase them and trade with your friends. As quoted by Benjamin Franklin “An investment in knowledge always pays the best interest”

Before starting out your respective journey on investing and trading, make sure you read up a lot and do your own research. Ultimately you are responsible for the actions and decisions you make. Learning from a mentor can help speed up your learning process. By mentor, I certainly do not mean any of those gurus who are there to sell you big dreams/Get-rich-quick classes.

Seedly Contributor: Lionel Ng

Lionel Ng sees himself as a believer of change and advocate of personal finance. On top of badminton as a hobby, he follows the stock market out of passion.

Editor’s note: The above is a really insightful article by Lionel Ng who is a part of our Seedly community. For readers who are interested in learning the ropes of investing, check out Seedly’s content on Investing!