Trading vs. investing

The terms trading and investing are often used interchangeably, but they actually represent two very different approaches to managing your money.

Trading is an active, ongoing skill which involves making quick decisions and anticipating market movements to make short-term gains. Investing is the act of growing wealth over time by creating a portfolio of investments which is regularly reviewed.

However, both goals involve optimising investment strategy and profits.

So, what is the difference between trading and investing?

The fundamental difference is a focus on long-term profits versus short-term profits.

Day traders are professionals who buy and sell instruments across the span of the same day, often within minutes or seconds of purchase. They are trained professionals who use software and tried and tested strategies to trade stocks, indexes, and other assets. Most day traders are employed by financial institutions and can move quickly to optimise their earnings.

Investors are individuals who assign, or ‘invest’ their money and resources with the goal of receiving a return on their initial investment. This can range from buying stocks and shares, bonds, buying physical assets and more. Most adult members of the population are investors if they have a pension, a savings account, or an investment portfolio.

Day trading is an active approach to investment that involves significant time, effort, and resource to accomplish. Investing is less active and requires less engagement from the investor as the returns are received over a longer period of time.

What does a day trader do?

Day traders work intensely for between two to five hours per day. The process involves ‘entering’ and ‘exiting’ different trading positions, with a view to making gains by buying cheap and selling at a profit. Forex trading is probably the most popular form of day trading – this is where currency pairs (for instance, GBP and EUR) are bought and sold in response to miniscule market movements or projected trading patterns. Multiple positions can be bought and sold in a single day.

Leverage is a key concept for day traders in a process called margin trading. This means using borrowed funds to make an investment. For example, a day trader with $10,000 in their account might use their existing assets as collateral to borrow another $10,000 from their broker. This means that the day trader can invest $20,000 in their next trade, which will inflate the value of any profits made, allowing them to pay back the broker. Of course, the risk here is that the value of the trade may result in a loss – one of the many reasons why day trading is not for newbies!

Day traders must be able to stomach significant losses and tolerate significant expense and stress. They should also be comfortable with borrowing money and operating with high-pressure environments with confidence.

What does an investor do?

Where trading is high-energy and high-risk, conventional investing is methodical and carefully calculated. Conventional investors invest their capital with the expectation of making long-term returns. This means managing their risk appetite and making decisions based on their financial goals, the value of their capital, and their understanding of the sectors they are exposed to.

Investors have access to a wide market of options, from low-risk bond and cash savings to higher-risk cryptocurrency and hedge fund bets. Once an investment has been chosen, it's added to a portfolio and – depending on the strategy – remains there for a long time.

Where traders move with speed and accuracy in volatile markets, investors are playing a long game. As the markets historically provide inflation-beating returns over time, investments are held until it's an optimal time to sell. Many stocks and shares can also pay dividends that provide passive income, and investors can adjust the composition of their portfolio to rebalance their exposure, or reflect their changing personal, professional, and overall life goals.

This makes investing an essential, long-term approach that rewards constancy and takes a long-term view to provide reliable returns.

Traditional investors should be willing to weather volatility for long term gains, and able to check the health of their portfolio on a quarterly basis, while avoiding knee-jerk buy or sell approaches.

Unlike day traders, who take a shorter investment horizon, investors can also make use of compound interest to optimise their returns. This involves reinvesting any gains to earn interest on interest, which grows over time.

Can they work together?

It's possible to combine trading and investing, but you need to really know what you’re doing before attempting this.

Trading and investing require two very different mindsets which are not necessarily compatible. For instance, a trader might see stock market volatility as an opportunity to make quick gains and offload poorly-performing stocks, whereas an investor will view volatility as a natural economic event which needs to be weathered.

The trading mindset only really works when you have the ability to monitor your investments full time, in real time. Otherwise, you risk making poor choices under intense pressure which could wipe out years of carefully managed gains within your investment portfolio.