Investing vs. Trading: What’s The Difference?

Most of us who are engaged in the stock market have numerous avenues to generate income, with two primary methods being investing and trading. Yet, comprehending the distinctions between investing and trading might prove challenging, particularly for newcomers to these strategies.

Here’s an overview of the fundamental disparities between investing and trading, along with considerations for determining which may align more effectively with your financial goals.

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Key Differences Between Investing & Trading

The variance between these approaches can be distilled into four core factors: time horizon, which pertains to the duration one intends to maintain a position, mindset or objective, delineating whether one adopts an ownership perspective or pursues short-term gains, and other factors which are highlighted below.

InvestingTrading
Objective Investors in Singapore often focus on long-term wealth accumulation and capital appreciation. They may prioritize dividend income and steady growth, but regional economic conditions and market structures can influence investment strategies.Traders in Singapore may focus on shorter-term price movements, aiming to profit from market fluctuations, while traders based in other regions globally engage in strategies like day trading, swing trading, and algorithmic trading, with a primary goal of capturing short to medium-term price movements.
Time horizonInvestors in Singapore typically have a longer time horizon, holding assets for years or even decades. Global investors may also have long-term perspectives, but market dynamics and economic conditions in different regions can impact the optimal time horizon for investments.Traders in Singapore typically have a shorter time horizon, ranging from minutes to weeks. Not the other hand, global traders may engage in high-frequency trading, intraday trading, or short-term swing trading, depending on market conditions.
Asset classesCommon asset classes for investors in Singapore include stocks, bonds, real estate, and investment products like Real Estate Investment Trusts (REITs). Global investors have a broader range of asset classes to choose from, including exposure to international stocks, currencies, and commodities.Traders in Singapore often deal with stocks, forex, and derivatives, taking advantage of price volatility, while global traders have access to a wide array of financial instruments, including global stocks, commodities, currencies, and complex derivatives.
Risk toleranceInvestors in Singapore often have a conservative approach, emphasizing stable and income-generating assets. Global investors may have varying risk tolerances influenced by factors such as economic conditions, geopolitical stability, and global market trends.Traders in Singapore may have a higher risk tolerance as they actively engage in buying and selling based on short-term market movements. Risk tolerance among global traders can vary widely, with some pursuing aggressive strategies and others adopting more conservative approaches.

Important Considerations When Investing vs. Trading

Tapping on the right financial tools for analysis

Traders primarily concentrate on forecasting future price movements and devising strategies to capitalise on them, relying heavily on technical analysis. This entails collecting and scrutinising statistical data concerning market activities, encompassing returns, stock prices, and trading volume. Additionally, traders utilise chart patterns, trends, support and resistance levels, as well as price and volume behaviour to pinpoint trading opportunities with favourable outcomes.

Conversely, investors prioritise fundamental analysis, which revolves around assessing a security's intrinsic value or its authentic worth. This involves evaluating various economic and financial elements, ranging from microeconomic indicators such as the balance sheet and management performance to macroeconomic factors like overall economic conditions, industry dynamics, and shifts in consumer behaviour.

Being aware of hidden costs

Trading incur significant tax obligations due to frequent realisation of profits from asset sales, it usually operates within what is known as a zero-sum game. In this scenario, when one trader profits, it is typically at the expense of another trader.

For instance, options trading involves a series of speculative bets among traders regarding a stock's performance. If a contract yields a $1,000 profit, this amount is essentially transferred from the losing trader to the winning trader. Thus, trading essentially involves redistributing wealth among participants, with those possessing greater skill accumulating wealth from less proficient counterparts.

Conversely, investing represents a positive-sum game, wherein multiple individuals can achieve gains. Investors realise profits when the underlying business flourishes over time.

Leveraging on a mix of strategies

Traders and investors typically use a mix of strategies. For investors, it encompasses:

  • Value Investing which is identifying undervalued assets based on fundamental analysis, seeking long-term growth potential.
  • Growth investing that involves selecting stocks with high growth potential, focusing on companies poised for rapid expansion.
  • Income investing which prioritises assets that generate regular income, such as dividend-paying stocks or bonds.
  • Diversification that requires spreading investments across various asset classes to mitigate risk and maximise returns.
  • Tactical asset allocation which needs precise adjustments of portfolio allocations based on short-term market conditions to capitalise on opportunities.
As for traders, the mix of strategies often include:
  • Day trading which is about buying and selling securities within the same trading day to capitalise on short-term price movements.
  • Swing trading, a method that involves holding positions for several days or weeks to profit from medium-term price fluctuations.
  • Momentum trading which entails riding the momentum of trending stocks or assets to exploit price momentum.
  • Scalping of numerous small trades to profit from small price changes throughout the day.
  • Arbitrage that is essentially simultaneously buying and selling assets in different markets to exploit price differentials.

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Frequently Asked Questions

Is investing different from trading?

Yes. The variance between investing and trading approaches can be distilled into four core factors: time horizon, mindset/objective, asset classes and risk tolerance.

Which is the best strategy for investing?

There is no one “best strategy” for investing as it really depends on what your risk appetite is, your current financial situation, your assets owned, your future financial goals and many other factors.

Moreover, most investors typically use a mix of strategies including value Investing, growth investing, income investing, diversification, and tactical asset allocation which needs precise adjustments of portfolio allocations based on short-term market conditions to capitalise on opportunities.