Trading vs Investing
Key Differences Explained

Investing and trading are similar but not identical activities. Both involve participating in financial markets and can involve the buying or selling of financial instruments, including shares, currencies, indices, commodities, and funds. They differ from each other based on their time horizons, trading frequency, types of instruments traded, as well as how each person tracks developments in these markets.

Providing readers with an understanding of the differences between trading and investing will also help them better understand the terminology used in the financial markets. Readers will also find this information useful when evaluating products, platforms, fees, trading conditions, and risk disclosures.

The purpose of this article is to explain the basic differences between trading and investing; it is intended solely to be educational in nature and to assist readers with their investment decisions; therefore, no recommendations on specific products, strategies, or actions are made.

What is Trading?

In general, trading is the act of buying or selling a financial instrument over a relatively short period of time. Depending on the product being traded and one’s individual trading method, a trader may hold a position for any period of time between minutes, hours, days or weeks.

A trader may watch the prices of the markets they follow on a regular basis and often use a trading platform to execute trades and manage their orders. Traders can trade in a variety of market types including but not limited to forex, shares, indices, commodities and derivatives.

For example, if a trader believes that the EUR/USD currency pair will increase in value they may enter into a long position by placing an order to purchase that currency pair at the current price. Later in time if the actual market rate of this currency pair increases they could then exit this long position by placing an order to sell that currency pair at the current market price.

Timing of a trade can also vary as well. Some traders will focus on day trading and enter and exit the same position multiple times in the same day while other traders take a longer-term approach to trading where they hold a position for a longer period of time before exiting that position. There is no single, defined holding period associated with all types of traders that use any particular trading methodology.

What is Investing?

When most people think of "investing," they usually think about buying and holding something (usually some type of money) for a long period of time. Common examples include stocks (shares) and bonds (debt) but can include funds, real estate, or anything else depending on the market and your personal situation.

Some stocks represent ownership in one company, but other investments allow you to invest in many companies, sectors, or markets as a group rather than just one company.

Investments can be held for very different lengths of time; some people will have bought a stock, bond, or mutual fund and will continue to own it for years, whereas another person may want to sell their investment in a matter of months depending on their plans.

Trading and Investing at a Glance

The distinctions outlined here are general and should not be construed as hard and fast rules. A trader may buy certain instruments and hold other assets over time. Therefore, it is imperative that traders examine the features of each product carefully and on an individual basis.

Time Horizon and Market Activity

The primary contrast between investing and trading is their time horizon. Investors typically hold on to investments for a longer time than traders.

A trader pays close attention to market prices and their changes over shorter periods. They may monitor economic reports, corporate announcements, news that affects their industry, charts, or changes in market conditions. Likewise, traders tend to have more frequent reviews of open positions.

When compared with traders, investors generally pay more attention to the underlying factors determining whether or not they price at which they will buy an asset. Such as the characteristics of the asset being traded, company fundamentals, the industry or the sector the company operates in, and longer-term historical trends in relation to an industry or sector's behavior.

Regardless of whether one adopts a long- or short-time horizon, they are still exposed to some level of risk in the financial markets.

Financial markets can move quickly or slowly in either direction, at any time, and investing over a long time does not ensure a positive return, nor will trading activity generate immediate changes in prices.

Products and Ownership

Another important distinction among financial products is that some types of products involve owning a portion of the product itself. For instance, if you purchase shares in a company, then you can own part of that company.

Whether or not you have rights associated with your ownership will depend on things like the type of share you're holding, the rules of the market and how the company is structured.

On the other hand, you can gain exposure to the price movement of an asset without actually owning it by using a product like a Contract For Difference (CFD).

When you enter into a CFD contract, you are agreeing to pay or receive the difference in the price of an asset from one point in time to another based on the performance of the underlying market (i.e., a currency pair, index, commodity or share).

However, the CFD does not give you any ownership of the underlying market itself.

The reason this is important is because how you structure, what you pay for and what rights you have to each product will depend on whether or not you had an ownership interest in the product.

Therefore, be sure to read both the relevant product specification and any applicable legal documentation before using any product at all.

Costs and Market Conditions

Trading and investing have associated costs. The associated costs of trading/investment could consist of; spreads, commissions, financing charges, custody fees, exchange rate fees and other platform charges. The applicable charges will depend on the product, provider and the market.

For trading product, the cost may be impacted by trading volume, size of position, and liquidity in the market. In fast-moving markets, the price can change quickly, which may cause the execution price to differ from the price when the order was submitted.

Costs for investment products will typically depend on the structure of the product, account type, and the service arrangement provided. The cost may also consist of management fees, transaction fees or other charges that occur on an ongoing basis.

Determining all applicable charges on the product is essential to understanding the product. The costs will also correlate with the product’s characteristics, overall market conditions, and level of risk.

Risk and Price Movements

All financial markets involve risk. Prices can change because of economic data, central-bank decisions, company announcements, market sentiment, political developments, supply and demand, or unexpected events.

Trading products that use margin or leverage require additional understanding. Leverage can increase market exposure, which can also increase the effect of price movements on a position. Margin requirements may also change according to product conditions and market activity.

Investment products can also be affected by changing market conditions. The value of shares, bonds, funds and other assets can move over time, and there is no certainty that a market will move in a particular direction.

Understanding risk means reviewing the product, trading or account conditions, relevant fees and personal circumstances before taking action.

Points to Consider Before Choosing an Approach

There is no single approach that applies to everyone. The following questions can help readers understand the factors that may be relevant when learning about trading and investing: