Trading Vs. Investing

What to opt for?

Any approach to trading can prove to be effective - be it a passive strategy such as investing or an active one such as trading. However, no matter which way you choose, it is important to understand that the way should be progressive and the trend favorable. After all, the main goal for any trader is to make a profit and increase capital.

Outstanding American novelist Theodore Dreiser described the way from an ordinary speculator to a stock exchange tycoon in his trilogy “The Financier”, “The Titan”, and “The Stoic”. This trilogy is a must-read for all those who have a passion for financial markets and trading.

To set the terms “trading” and “investing” apart, we can conclude that trading is the activity on the foreign exchange market, or speculating, while investing means participating in the stock exchange market. But luckily, there is such a mathematical notion as differentiation. This method allows for combined approaches. For example, a trader can spend a minor part of a portfolio on investments while the bigger part can be used in more active strategies such as speculative trading on Forex. It also works the other way around.

The Trader and the Investor

Unlike investing, trading requires a constant presence in the market. Sometimes, when the market is especially active and provides good trading opportunities, deals are conducted non-stop. The quotes of shares, indices, and currencies are changing continuously during the day. A universal principle is applied: Buy low, sell high. Though trading entails higher risks, it also may prove to be more effective in case the position direction and the exit point are chosen properly. At the same time, one of the risk management rules can be applied: do not involve all your disposable funds in speculating but use a part of it.

Typical features of a successful trader nowadays

Nonconformist. The traders who move against the majority but not against the trend have a chance to profit more than others. Such traders prefer working with specific trading instruments and always sell when others buy and buy when others sell.

Analyst. Both fundamental and technical analysis are the key ingredients of a trading success. Anyone without extensive expertise can master the technical analysis whereas fundamental analysis can be conducted by those who are familiar with cash flows, corporate reports, bonds, and other financial terms and notions.

Disciplined Pragmatist. The pace of market movements is often high, so a trader needs to be able to assess the situation immediately, using well-managed tactics and a clear strategy. Besides, willpower and determination are also quite important characteristics.

Traders who employ short-term strategies should have enough free time and affordable funds that they can use for trading on the spot. In addition, they should be ready for variable success and possess personality traits of sanguine and choleric people.

Typical features of a successful investor nowadays

Patient and self-possessed optimist. Warren Buffett compared investing with baseball. The stock market pitches while a trader needs to wait for the proper moment and hit a home run, i.e. to score a clear-cut victory without making any errors.

Well-educated but ready to replenish their knowledge. Let us refer to the example of Warren Buffett again. He has always been reading a lot. He can devour up to a hundred pages a day despite his respectable age of 90 years. The passion for learning has helped Mr. Buffett to avoid many pitfalls. If he happened to make some poor decisions, he could easily analyze them and make the right conclusions thanks to his vast store of knowledge.

If you have enough time and desire to study the corporate reports, then active investments are more likely to suit your needs best. However, you should always remember about diversification. Whatever bright prospects a given company or an industry may seem to have, you’d better refrain from putting all your eggs in one basket.

At the same time, if you do not want to spend your time monitoring the companies’ performance, you can opt for ETFs on stock indices and bonds. It is also possible to combine ETF investments with separate stocks but there is no guarantee that active investments will have higher profitability. The passive approach can prove to be more effective.

The things you need to know

1) Speculative trading implies short-term owing of the underlying assets - from several minutes to several months. Deals tend to be frequent, and their effectiveness is quite volatile similar to the market itself. Besides, the risks are high but the possibility of getting profits is also high.

2) Active investments are characterized by longer terms. They can be held for years or even decades. Deals are less frequent than in speculative strategies. Traders employing such strategies should be patient as they are unlikely to get any immediate profits.

3) Passive investments are made for years and decades. The frequency of deals is even lower than in active investments which allows reducing the trading costs.

4) In speculative trading, traders decide what instrument to choose based on the technical analysis of charts and trade volumes. Speculators usually pay attention to financial news, macroeconomic events, and corporate reports.

5) Active investments require fundamental analysis of the companies’ performance and their financial reports. Investors take interest in buying a share in a solid business and getting profits from it in a form of dividends.

6) The objects of passive investments are often ETFs and index funds. The decision-making process is somewhat easier in this case. There is no need in trying to find prospective leaders, and temporary price fluctuations do not affect an investor greatly.

7) Speculative traders do not tend to diversify their investments in such instruments like currency pairs. As a rule, they work with one or two trading instruments. This approach enables them to learn the ins and outs of a particular currency and follow the trend more often than miss it.

8) In active investment strategies, a portfolio is usually well-diversified, and the money is invested in several companies in different industries.

Forex investing does not mean only trading

The main purpose of investing in the foreign exchange market is to make a profit through speculative operations. It can be not only a separate strategy but also a part of an investment portfolio.

The forex market has gained vast popularity thanks to high liquidity and such tools as leverage. It attracts many participants, being one of the most available marketplaces. The current price of any currency depends on the objective demand and supply factors and cannot be subject to any manipulations. А huge volume of the market makes it impossible to control the price movements even for the biggest market players such as central banks.

Forex is considered to be the biggest market, thus providing the highest possible liquidity. Due to this, orders can be executed in a blink of an eye. Besides high liquidity, most brokers offer leverage that enables traders to place bigger positions with the use of relatively small amounts of their own funds.

The currency market provides vast opportunities for investors. However, to reach success, a trader needs to understand the factors that influence currency rates.

No matter which way you choose - investing or trading. The main thing is that you choose the right partner. You can trust your funds or rely on the market picture provided that your broker or stock adviser sticks to the fair play rule. The leading brokers that have been in the market for ten years or more are able to guide you through this field and provide you with the necessary information such as analysis and forecast.