What is Trading?
Trading is a fundamental economic concept that involves buying and selling assets. This can be the purchase of goods and services, where the buyer pays the compensation to the seller, or the transaction can involve the exchange of goods and services between the trading parties.
In the context of the financial markets, the assets being traded are called financial instruments. These can be stocks, bonds, currency pairs on the Forex market, options, futures, margin products, cryptocurrency, and many others. If these terms are new to you, don’t worry – we’ll explain them all later in this article.
The term "trading" is commonly used to refer to short-term trading, where traders actively enter and exit positions over relatively short timeframes. However, this is a slightly misleading assumption. In fact, trading may refer to a wide range of different strategies, such as day trading, swing trading, trend trading, and many others.
What is Investing?
Investing is allocating resources (such as capital) with the expectation of generating a profit. This can include using money to fund and kickstart a business or buying land with the goal of reselling it later at a higher price. In the financial markets, this typically involves investing in financial instruments with the hopes of selling them later at a higher price.
The expectation of a return is core to the concept of investment (this is also known as ROI). As opposed to trading, investing typically takes a longer-term approach to wealth accrual. The goal of an investor is to build wealth over a long period of time (years, or even decades). There are plenty of ways to do that, but investors will typically use fundamental factors to find potentially good investment opportunities.
Due to the long-term nature of their approach, investors usually don’t concern themselves with short-term price fluctuations. As such, they will typically stay relatively passive, without worrying too much about short-term losses.
Trading vs. Investing – What’s the Difference?
Both traders and investors seek to generate profits in the financial markets. Their methods to achieve this goal, however, are quite different.
Generally, investors seek to generate a return over a longer period of time – think years or even decades.