Understanding the different terms used in the financial markets is key to developing the skills needed to achieve your financial goals. Something that should be clarified right from the start is the difference between investing vs trading.

Discover what investing and trading are, as well as some of the crucial differences between the two, to help you decide which might be the better fit for you.

What’s the difference between trading and investing?

The terms “investing” and “trading” are often used interchangeably. Both involve opening an account with a broker, and buying and selling financial assets. However, there are key differences between the two approaches, and clarifying what lies behind the “investing vs trading” debate will put you in a better position to successfully meet your personal objectives.

What Is Investing?

Investing involves buying assets with the aim of making a long-term financial return. The length of this process will depend on your individual circumstances . Some people invest to achieve financial independence and retire early, whereas others invest to fund education or celebrations, such as weddings. Regardless of the aim, investing usually involves following a strategy with an investment time horizon of at least a year.

Investors will usually choose assets that they expect to increase in value by the time they are ready to convert their investment back into cash. There are no definitive rules about which assets should go into an investment portfolio, and diversifying your portfolio across different asset classes is an option that many experienced investors choose.

The assets themselves are not the factor that distinguishes investing from trading. Instead, the major difference is the length of time for which you hold them.

What Is Trading?

Trading focuses on short-term market movements. Traders aim to profit from the market's ups and downs, buying assets at a low price and selling them when they believe the price has risen sufficiently.

Trading is more speculative than investing and involves the implementation of short-term strategies. Traders tend to focus on which direction an asset’s price is likely to move, rather than the reason behind it. These moves might be driven by shock news events or other momentary pricing anomalies, which can be explained by technical analysis.

Trading requires active management of positions and the monitoring of news feeds. Traders are also likely to use risk management techniques, such as stop-loss orders, to automatically close out losing trades, rather than waiting for them to become profitable again.

What Are the Key Differences Between Investing and Trading?

	Trading	Investing
Timescale	Short-term	Longer-term
Goals	Short-term profits	Longer-term profits
Risk	Higher risk	Can have less risk, but is still inherently risky
Return generation	Buying and selling assets	Can also involve shareholder dividends
Liquidity	Requires high liquidity	Less likely to require high liquidity, although some liquidity is needed
Ownership of the asset	Not in case of derivatives	Yes
Going short	Allowed with some derivatives	Only through selling assets or inverse exchange traded funds (ETFs)
Leverage	Allowed with some derivatives	Only through leveraged ETFs

Duration & Objectives

Investors engage in a long-term strategy, holding assets for years to achieve profits. Traders, on the contrary, operate in the short term, aiming for quick gains by strategically timing their buying and selling.

Risk Factor

Investing, due to its extended timeframe, may endure short-lived market fluctuations better than trading. Traders face higher and quicker risks, operating within a condensed timeline. However, both activities carry inherent risks, including the potential for financial loss.

Return Goals

Traders seek immediate profits by actively buying and selling, while investors may diversify income sources, such as earning from shareholder dividends.

Market Liquidity

Traders require high liquidity for swift transactions, contrasting with investors who can tolerate lower liquidity as they don't engage in frequent trades.

Asset Ownership

Investing often involves owning the actual asset, like company shares. Trading may center around derivatives such as futures contracts or CFDs, not direct asset ownership.

Short Positions

Traders can speculate on a price decline using derivatives like CFDs. In investing, going short is possible by selling owned assets or utilizing inverse ETFs.

Leverage Usage

Traders, especially with CFDs, leverage positions to control larger assets with less capital, amplifying both gains and losses. Investors can leverage through leveraged ETFs, but it's less common and carries similar risks.

Final words

The major differences between investing and trading are approaches, risk, and time involved. It is okay to do both, and it depends on the risk-taking ability and patience of the person to choose between either of these or both of these. Investing is long-term and involves lesser risk, while trading is short-term and involves high risk. Both earn profits, but traders frequently earn more profit compared to investors when they make the right decisions, and the market is performing accordingly.