Trading vs Investing – Which is a better approach?

Investors and traders both face risks. But since their strategies differ, the issues that they have to address are also different. Nonetheless, they have some similarities in various aspects. There seems to be plenty of confusing among traders and investors. Most don’t even know the difference and that’s actually quite dangerous in my opinion. So this post is all about making it clear on what’s trading vs investing.

Trading vs Investing – The Issue of Volatility

Stocks are extremely volatile financial instruments. To traders, volatility could be risky but rewarding. For instance, a trader could buy a penny stock and expect it to rise by 50 percent. But he must take note that his penny stock trade could likewise lose as much as 50 percent as well. Volatility could be his friend and foe.

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On the other hand, investors could choose to combat volatility with time. By accumulating shares through years, his investments could slowly rise. However, he could lose some opportunities to make profits on some potentially rewarding trades that could emerge in the market.

Trading vs Investing - Traders on Wall StreetTrading vs Investing – Traders on Wall Street

Trading vs. Investing – Dealing in a Bearish Market

When stocks dip significantly due to the shift of the market from a bullish stance to a bearish one, investors and traders could face both trouble and opportunity. For the trader, he could do short sales. But his previous purchases during a bull run would cause him some losses. Similarly, the investor would see the value of his investments plummet. Nonetheless, the investor could accumulate shares of stable companies once the market stops plunging and starts moving sideways.

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Trading vs Investing – Tax and Transaction Costs

The trader must bear in mind that doing transactions too frequently could hurt him. Transaction costs could surpass his gains and cause him some losses. He must make sure that his gains could exceed his transaction expenses.

Typically, traders would have to pay higher taxes than investors. As investors hold stocks for a longer period of time, they are mandated by law to pay lower taxes. Provided that a trader profits from a trade, he must pay 25 percent or higher in capital gains taxes. Investors, who usually hold their stocks for more than a year, would have to pay around 15 to 25 percent in taxes if they sell their shares for capital gains. As such, traders must take note of these tax expenditures when they sell.

Trading vs Investing – Lack of Financial Knowledge

Despite the difference in strategies and the risks they take, traders and investors could be both at risk if they do not have the proper financial knowledge in their dealings. The greatest risk anyone could face is financial ignorance.

If a trader merely buys and sells based on speculation and hot tips, he would expose himself to great downside risks. Indeed, a stock that rises quickly on speculation could fall as soon as it has risen.

If an investor does not know how to read financial statements and reports, but makes decisions mainly hastily, he could be throwing away his money. If he continuously accumulates shares of a company with weak fundamentals and lackluster growth potentials, he could expect his investment thrown down the drain.

Traders and investors have different risks to bear in mind. Since their strategies are different, they have distinct challenges to take note of. Nonetheless, they must both know and understand how to analyze and pick stocks depending on their crafts.

Trading vs Investing - Investing is a more passive approach to the marketTrading vs Investing – Investing is a more passive approach to the market

Trading vs Investing – Which is a better approach?

I guess it all boils down to individual preference and risk tolerance. And of course skill level. Personally, I feel much more comfortable with Investing because it is less volatile and my results have been more consistent with investing. I do trade as well but only using a small percentage of my portfolio. Investing is the way to go for me.

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William Tan

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