What's the difference between trading and investing?
When it comes to investing in the stock market, it’s important to remember that before you dive in, you need to understand the fundamentals. A common confusion among aspiring investors (or even just those curious about investing), relates to the difference between the terms investing and trading. For many of us, the first images related to investing we ever came across involved men making high-risk, fast-paced deals and decisions on an almost hourly basis. Yet, the reality of long-term investing couldn’t be more different: it’s actually quite a boring endeavour, which doesn’t make it any less worthwhile.
The thrill of the day trade
Actively and regularly trading on your accounts is a very different strategy compared to long-term investing. Trading is a short-term, volatile process that involves frequent transactions based on the trends in the market – with the aim to “beat” the market. Short-term can range from immediate transactions (for example, buying and selling a stock within minutes), to those that last weeks or months. The basic fundamental of trading is to buy when the price is low and sell when the price is high, but there are other strategies that day traders use, too – all of which are risky. Day trading involves studying charts, using indicators and analysing the various factors that affect both the market price and volatility in order to predict future patterns. This is all very complex, and not only will it take up a lot of your time, it also requires you to have a significant intermediate level of experience in order to be successful.
Day trading became especially popular worldwide during lockdown, partly because investors were attracted by the prospect of big gains, as well as having more time on their hands. In fact, according to a survey by research company Consumer Intelligences, nearly 1.8m adults in the UK have become day traders during the pandemic. As a result, investment influencers have appeared on Facebook, Instagram, YouTube, TikTok and Reddit, giving out ‘advice’ on how to get into investing and offering ‘get rich quick’ strategies. There’s no denying that high-risk investments have a powerful pull, especially for young, male investors – but it’s important to understand that day trading comes with high risks, and that you’re just as likely to lose your money as you are to make gains. If you want to try it at your own risk, just invest a little bit for fun, i.e. the money you can afford to lose.
Slow and steady wins the race
On the contrary, long-term investing in the stock market aims to build wealth gradually. Sure, there is no ‘drama’ or adrenaline when you make a regular monthly investment into a diversified portfolio of funds, but the historic long-term returns on equities means that even without all the excitement of day trading, you can make a pretty penny over the long-haul.
“Think of investing for the long-term as a strategy of wealth building, and day trading as something to do only if you have extra money that you aren’t afraid to lose. ”
Patience is an important factor when it comes to long-term investing. Successful investing strategies tend to develop over the long run and you may need to wait at least 5-10 years or even more to see the best potential returns. But remember: the longer your money is invested in the market, the more opportunity you have to capitalize on compound interest. Long-term investors are more concerned about the market fundamentals and not the upward or downward trends that change every day. You can think of long-term investing as a ‘set it and forget it’ type of approach: you decide on an amount you’re willing to put away into your investments each month, and leave them alone. Sure, it’s important to occasionally re-calibrate your portfolio – but unlike with day trading, you’re more likely to benefit from leaving your investments alone than trying to tamper with them.
Which one is right for me?
We aren’t financial advisers, so we can’t tell you definitively what you should or shouldn't do. However, long-term investing is the lower-risk, more sure-fire way to make returns in the long-run (none of this is guaranteed, of course, as all investing bears its risks). If you feel that only committing to the long-term is a bit too ‘vanilla’ for you, why not allocate an “opportunity portfolio”, a small percentage of your overall holdings, where you can take more risk? Think of investing for the long-term as a strategy of wealth building, and day trading as something to do only if you have extra money that you aren’t afraid to lose. And, as always, please consult a financial adviser if you’re still feeling unsure about the right strategy for you.