Many financial experts are saying that this is an excellent time to begin investing, but when you start shopping for investment products, you find that there is a huge variance between the product offerings. Understanding the terminology assigned to the various types of funds and products will help you choose the best one for your needs. Two terms that are commonly interchanged, and wrongfully so, are investing and trading. While these may seem like similar actions, they have some distinct differences.
What Is Investing?
Investing refers to purchasing an asset and holding it for a long time, in the hopes that it will increase in value. Many people invest in real estate. They purchase a piece of property, live in it or rent it for a while, and hope that over time it will be worth more when they go to sell. In the world of finance, investing works the same way. The investor purchases a financial product, such as stocks or funds, and holds onto them for a long time, hoping that they will increase in value during that time. A retirement plan is an example of investing.
In general, investing is putting money into something in the hopes of making more money after a long period of time. Investments are typically held for years before they are cashed in for profit. The longer the investment is held, the more its potential for earning will be.
Investors will study the long-term success rates of the companies they choose to invest with. They will look for funds or stocks that have steady growth over several years. They will try to buy when prices are low, but will not be as concerned about temporary drops or down times if the overall profit margin of a particular investment looks good.
What Is Trading?
Trading refers to using money to buy something in an attempt to make more money by selling or trading it quickly for something else. While it is similar to investing in the fact that the money is being used to buy something of relative value, it is different because the asset is only held for a few days or weeks before it is sold and something else is purchased. This is typically done with individual stocks or other commodities, not large funds or tangible assets like real estate.
Traders will buy assets when they take a sudden dip, and then sell them quickly for a profit when they increase in value again. Traders do not concern themselves with the long-term success history of the company in which they are putting money, but rather in the short-term trends.
The Difference Is Time Frame
Many people who are involved in trading consider it investing. In reality, there is little difference between the actions involved. In both money is used to purchase assets, and those assets are at some point sold in hopes of making a profit. The difference lies in the amount of time the investor holds onto the asset. In investing, it is for the long term. In trading, it is a temporary purchase.
This is, of course, a general definition. Some who are involved in trading will decide to hold an asset for a longer period of time if they stand to benefit, and some investors will sell quickly if they feel it is best. Overall, however, the goal is long term for investors and short term for traders.
So which is better? Both investing and trading have their benefits, but one option is likely to appeal to you more than the other based on how involved you wish to be in the growth of your money. The only way to decide which is best for you is to talk to your financial professional and weigh the potential returns against the level of risk you feel comfortable taking.