The rise of stocks and cryptocurrencies has caught the attention of many people who are new to the financial world. But are they traders (brokers) or investors? And what do you identify with most?
The terms “trade” and “investment” are used interchangeably. Yes, the goal of both is to obtain financial gain. But are they really the same thing?
Shares of many companies have skyrocketed during the pandemic. This market volatility – and the prospect of making a lot of money – highlighted the differences between trading and investing.
The first point to note is that the difference between trading and investing doesn’t really come down to what you buy or sell. Investors and stock traders tend to buy and sell the same assets (stocks, currencies and commodities). What really matters is how and when you buy and sell.
Key difference #1: time
The primary difference is when the asset is held.
Stock traders benefit from both rising and falling markets and tend to be “in and out” of positions (this is another way of saying “buying and selling”) over a shorter period of time. This means that you are likely to experience smaller but more frequent gains or losses. As mentioned earlier, stock traders often like volatile markets, because the greater the movement, the greater the chance that the market will go up (or down).
On the contrary, investors’ long-term focus keeps them interested for years or even decades, rather than weeks, days, hours, or even minutes for stockbrokers.
Stock traders tend to keep their eyes glued to their screens, constantly monitoring price movements. Investors do not usually follow price movements in the short term, and over long periods they may not even know the value of their holdings.
Key Difference #2: Strategy
Stockbrokers may have a strategy, but it is likely to be related to short-term fluctuations in price and may not be related either to the intrinsic value of the investment itself or to any of their personal goals.
This is very different from the investor. Most investors — because they’re looking for the long term — will consider factors such as the company’s future growth potential. This is just one example of how they choose which company stock they want to buy and which to hold.
Investors are also more likely to follow a personal plan. What is the investment for? Is it to pay off the house in a few years? Or will it be repairable? If it’s one of those things, for example, an investor can build a plan for when he’s likely to need cash. And that will influence what they choose to invest in.
Key Difference #3: Risks
Whether you are a stockbroker or an investor, you face inherent risks. You may lose some or all of your money.
But the risks are different. An investor who naturally buys and holds will, over time, make fewer decisions and transactions than a stockbroker, who frequently moves in and out of stocks. So, while an investor’s gains may be less dramatic than a stockbroker’s at certain times, it is also possible that there may be less dramatic losses.
Historical stock exchange data shows that the longer you have owned a company’s stock, the less likely you are to record a loss. Stock brokers, in contrast, do not have this guarantee, because they do not hold their assets for long.
Duncan Lamont, head of research at Schroders, analyzed past returns for the S&P500 and used them to show how longer investment periods reduce risk of loss. It shattered data from 148 years back. “We found that if you invested for a month, you would lose money about 40% of the time,” he says.
However, if you had been investing for a longer period, the odds would have shifted dramatically in your favor. On a 12-month basis, you would have lost money just over 20% of the time. Over five years, that number drops to 20%. At age 10 it’s close to 10%. At age 20, that’s insignificant.”
Trading and investing: what’s the difference? Last update: March 21, 2022 by