“A Rocky Recovery”, that’s how the current market condition has been labeled by many economists. It’s not a secret to anyone wanting to start investing or trading that the scene looks uncertain, with constant turmoil hitting the financial sector like inflation, three years of the pandemic, and the ongoing effects of an invasion, many beginner retail investors and traders are wondering what to expect.
Taking this into account, the forecast may not look promising but following what Warren Buffet says “Be fearful when others are greedy. Be greedy when others are fearful”, some retail investors are using futures for hedging or risk management.
If you’re wondering what are futures, it’s simple: the futures market is an exchange where investors can buy or sell commodities and futures contracts (crude oil, precious metals, and some foods).
But, should you invest or trade?
Main Takeaways
- Both trading and investing involve buying and selling financial assets, like stocks, bonds, mutual funds, real estate, and more, in order to get a financial return.
- Both investing and trading let you buy individual assets or a wide range of assets.
- The main difference is the timeline.
- Both have risks associated with losing money.
Investing
Investing involves buying an asset such as stocks, funds, bonds, cryptocurrencies, and other assets in order to get or expect an earning over time, usually for long periods of time. It can be done in many ways, you can focus on a market sector or diversify it and have a whole portfolio with a wide range of different assets. It comes with a set of risks you must understand before jumping in.
An understanding and analysis of the market is a must in order to make a wise decision.
Trading
Like investing, trading lets you buy and sell an asset for the purpose of making a financial return, usually, it’s done in the span of a day, weeks, or month, and sometimes even hours. Trading involves analysis of the market using tools, and indicators to assess the potential risks or returns. It’s a fast-paced approach, with bigger opportunities for gains, but more risks involved.
You’ll be buying an asset at a lower price and selling it for a higher price, and vice versa. There are many strategies and types of trading like swing trading, day trading, or scalping.
Differences Between Trading and Investing
The first thing to tackle is the differences between investing and trading, at some level they can be identical, both are financial ways of chasing a return based on the initial investment, but they are different. Investing usually implies holding the shares of an asset for months, years and sometimes decades, and on the other hand trading involves selling and buying shares within a short period of time, typically for hours, days, weeks, and months.
Risks Involved
A good rule of thumb is that any investment has the risk of losing money, this applies to both investing and trading, but the second one can be riskier (in a short period of time) if you don’t know what you are doing.
Traders, compared to investors, face two challenges. The market has a history of ups and downs, which means it recovers from each downturn but most of the time it’s not 100% predictable or quick. A full recovery in the bigger outlook can take a long time, even years, and trading being fast-paced may not be suitable for a rebound.
Time and Learning Curve
While both approaches require a set of skills and a learning curve, trading can be less timewise. The number of transactions, operations, and research trading takes, makes it almost a full-time or part-time job.
On the other hand, investing can be done with a set-and-forget mentality, since it’s often aiming for the long run.
Margin Trading
Another feature trading has is margin, where you get lending power to buy more shares and get bigger profits but bigger losses too, and this involves high risk in trading since investors can lose bigger amounts than their deposits. It’s some sort of credit that exchanges and brokers offer a trader upon an agreement.
Taxes
For every profit you make, you must pay taxes (not taking into account trading fees) for both trading and investing, with the difference that in investing you may pay fewer taxes since the profits from investing in individual assets are taxed depending on how long you hold the financial instrument.
If you hold an investment for a few months, or days (trading) you’ll pay taxes at a regular rate of your earnings (paycheck).
If you hold the investment for at least or over a year, you are eligible for the long-term capital gains rate, a lower tax rate.
In case you get losses and not profits, you can opt for a technique named tax-loss harvesting. It means you can counterbalance the profits from other trades/investments, writing them off from your taxes. This applies to both trading and investing.
