3 Key Differences Between Trading and Investing

Okey, we have previously seen that in order to achieve financial independence you need to put your money to work and invest.

But what exactly is an investor ?

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According to Investopedia :

“An investor is any person who commits capital with the expectation of financial returns. Investors utilize investments in order to grow their money and/or provide an income during retirement, such as with an annuity. A wide variety of investment vehicles exist including (but not limited to) stocks, bonds, commodities, mutual funds, exchange-traded funds (ETFs), options, futures, foreign exchange, gold, silver, retirement plans and real estate. Investors typically perform technical and/or fundamental analysis to determine favorable investment opportunities, and generally prefer to minimize risk while maximizing returns.”

Okey so first, an investor expects returns on his/her investments — that’s understandable, personally I don’t want to put my money to work for it NOT to work. Second, the purpose of investments is to grow money or provide an income. Third, investments are well-thought and tend to minimize risk while maximizing returns.

Okey so what’s a trader then ?

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According to Investopedia :

“A trader is an individual who engages in the buying and selling of financial assets in any financial market, either for himself or on behalf of another person or institution.”

A trader BUYS and SELLS financial assets — assets that can be converted into cash quickly and whose value derives from a contractual claim such as bonds, stocks and bank deposits unlike physical assets such as real estate. Traders can speculate which means they can trade assets or make financial transactions with high risk but high possible return — when they lose which they often do, they lose BIG like really big !

 

Okey now so what are the differences between a trader and an investor ?

1. How long they hold their assets

As I said, a trader BUYS and SELLS. He never holds onto an asset for too long before selling it. However, an investor buys assets and usually holds onto them for much longer — years even decades. That’s the biggest difference between the both of them.

2. How much they are willing to lose

Investors look for low risk high return investment opportunities. Therefore, they usually know how much they are willing to lose before they basically GET OUT.

On the contrary, traders focus on the return — the higher the better — and as they sell much quicker than investors, they don’t care — at least firsthand — about how big the risk may be — which increases their chance of losing money big time !

3. Their strategy

Generally investors will fully research companies and diversify their assets portfolio in order to really minimize risk. Moreover, they don’t sell — or buy — stocks as soon as their value goes down — or up.

Again investors BUY and HOLD where traders BUY and SELL.

 

If there’s anything you would want to add or share, please do so in the comment section :). I am learning as I write these articles so don’t hesitate to correct me if I said something wrong.

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