Everyone who comes to the financial market to make money faces the choice: What’s better, to become an investor or a trader? Today we’ll try to figure out the difference between trading and investing, their main advantages and disadvantages, and what novice traders should pay attention to when making up their minds.
Trading vs. investing
A trader is a market participant who profits from short/long term changes in the exchange rate of currencies or the prices of stocks.
Trading is a full-fledged job that requires training, experience, and a good knowledge base. You can’t just download the trading platform and start earning. To predict price movements, a trader needs to understand the rules of the market and intricacies of the trading process and be able to conduct various types of market analysis. Before opening a trade, the trader should thoroughly evaluate the situation, examine the charts, analyze how the price moved over a certain period of time, identify the appropriate points to enter the market.
Advantages of trading
- no need to freeze your money for a long time;
- you can make a good profit on short-term market fluctuations;
- you can earn both from an increase and a decrease in prices, in contrast to investment.
Disadvantages of trading
- very time consuming;
- the market is volatile and unstable, no steady income;
- high risks.
Ok, so what about investing then? An investor invests his money in currency, stocks, or bonds. He investor receives a return on his investment only when assets grow. Some investors receive income from dividends paid to them by the issuer. As a rule, most investments are long-term, a year or more. The yield is lower here because of the lower number of transactions. An investor focuses not on quantity, but on quality.
It’s also worth noting that in the case of investing potential risks are much lower too, as the long-term trend for stocks usually goes up. The main goal is to wait for steady growth. You can also invest in currency, but it is more complicated. The foreign exchange market is more impulsive and unpredictable.
An investor usually makes his decisions based on fundamental analysis. Fundamental data allows him to evaluate the long-term potential and profitability of an asset. Technical analysis is applied only to find the market entry point.
Advantages of investing
- saves time;
- can become an additional source of income.
Disadvantages of investing
- money is frozen for a long time;
- difficult to master, it takes time to learn the intricacies of this direction.
Are there any alternatives? Fortunately, there are – asset management. For a long time, PAMM managed accounts were the only way to make a passive income. Not so long ago, the RAMM service appeared. It combined the best features of the previous investment methods, adding a number of new ones. The investor’s activity here is minimal. He just needs to find a trader and a strategy to invest and wait for first profits.
To sum up
Although trading and investing are two different processes, they can be perfectly combined. An experienced trader often knows which stocks have good profit potential and can invest in them, or choose to invest in RAMM account. On the other hand, savvy investors who keep their finger on the pulse of the stock market understand how trading works, so they can successfully trade stocks or currencies and earn income too.
The combination of trading and investing is a good way to diversify your profits. It can help you protect your deposit and generate more profits at the same time.