So you’ve finally saved up some money and are now wondering whether you should engage in investing vs. trading. There are similarities and notable differences between the two, and it’s important to know which one suits you more in this evolving economy.

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Between investing and trading, you may hear different points of view from traders and investors. It’s important to read thoroughly about each of them to further understand your financial goals, your willingness to learn, and your risk tolerance.

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Find out more about these two financial strategies to help you get to the next level by reading the article below.

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Understanding Investing and Trading

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Let’s start with the basics first to get a better grasp of what these two strategies entail. As Warren Buffet shares, it’s essential to have a strategy. Both have the potential to gain profits, but there are key things to take note of.

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What is trading?

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Trading is the act of buying and selling financial assets with the intent of gaining quick profits. A trader involves himself in frequent transactions where the timeline could be as fast as monthly, weekly, or daily returns. Some day traders even purchase and sell within minutes.

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Traders may be classified into two camps: day trading and swing trading. A day trader would typically trade multiple stocks within a day, and a swing trader would wait a few days or weeks. The former would utilize charts and heavy technical analysis to decide how fast the transaction would be, and the latter would use tools that could indicate daily or weekly movements, and technical patterns.

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The nature of trading is a fast-paced, high-risk environment that aims to seek out profit quickly and in multiple amounts.

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What is investing?

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Between investing and trading, investing involves buying an asset, such as stocks, bonds, ETFs, or commodities, to earn some profit after some time. Investors usually wait for a longer period, spanning from years to decades. There are potential losses, but investing involves riding out short-term losses and focusing more on building wealth over a long period. Investing may involve a more diversified portfolio and gaining profits from compound interest.

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Similarities of Investing and Trading

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Both activities use tools to determine which types of financial assets are to be bought and sold. This helps make a strategic decision whenever a purchase is to be made or whether it’s time to sell. Both investing and trading aim to take their money to the next level by earning a profit on their initial investment.

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Differences between Investing and Trading

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The main difference between an investor and a trader is the amount of time before they decide to sell or exit their stocks. Investors have a long-term vision and study the company’s business fundamentals. They’re willing to ride out short-term losses and will keep funds there as long as the company it invests in continues to do well.

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Another investor vs. trader difference is the frequency of profits, where traders study the volatility of the market and act swiftly depending on the market timing. Traders watch the market, allocate time for research, and manage their portfolios actively.

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While risk is present in both investing and trading, the risk tolerance for each type is much different. The risk is higher for trading compared to investing, where some people just “set it and forget it."

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Investing and Trading Success Stories

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The most famous investor is none other than Warren Buffett, the “Oracle of Omaha," now with a net worth of over $100 billion through investments. He built his investment partnership company, Berkshire Hathaway, where he has been able to help shareholders build their wealth too. He started investing when he was 11, and one of his famous quotes on investing is, “If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes.”

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Another inspiring story by a well-known trader is Richard Dennis, who wasn’t born into wealthy parents or had any connections. He started working as a runner at the Chicago Mercantile Exchange when he was only 17 years old, where he did tasks for traders. He couldn’t trade under his name at that time, as he had to be at least 21 years old to trade. Instead, he had his father act as his proxy and guide him through the trading process. Eventually, he borrowed $1600 from his family so he could get a seat at the MidAmerica Commodity Exchange for $1200 and $400 for capital. In his first year, he increased the $400 to $3,000, then to $100,000.

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  Investing vs. Trading: What to Consider

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It's important to understand the similarities and differences between investing and trading. Both have risks involved, and it’s important to understand your risk tolerance, your financial goals, and the time you need to manage your portfolio. Study your options well and keep in mind what Warren Buffet said: "Never invest in a business you cannot understand."

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‍Disclaimer:

This article is for informational purposes only. Do not consider any such information or other material as legal, tax, investment, financial, or other advice.

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