There is a question that newcomers to the financial markets frequently ask, and even experienced players argue on occasion. How can you tell the difference between investing vs trading? Trading and investing are sometimes confused as interchangeable activities because they are carried out in very similar ways when viewed through the lens of the financial markets.
After all, both trading and investing are, at their most basic levels, the use of capital in the search of profits. So this makes us to understand what is difference between investing vs trading. If I buy ABC stock, I expect it to rise in value or pay dividends – or both. Trading, on the other hand, differs from investing because it usually involves an exit strategy. This might be expressed as a price target or the length of time the position will be held. In any case, the deal is thought to have a limited lifespan. Investing, on the other hand, has a far broader scope. An investor will purchase a company's shares having no idea when or if he or she would sell it.
To show the differences, we can take examples. Warren Buffet is a businessman and investor. He buys companies that he believes are undervalued and holds them for as long as he believes their prospects are promising. He doesn't take into account the cost at which he'll sell shares.
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| Investing vs Trading |
George Soros is a businessman and trader. His most well-known trade was shorting the British Pound when he believed it was overvalued and about to be withdrawn from the European Exchange Rate Mechanism. He chose this viewpoint because of a unique scenario. Soros profited handsomely once the Pound was allowed to float freely and quickly devalued in the market. This satisfies the requirement of having a predetermined exit, making it a trade rather than an investment.
However, there is another method to describe trading as contrast to investing. It has to do with how well the applied money is projected to generate a profit. The goal of trading is to increase your capital. You buy ABC stock at 10 with the expectation that it would rise to 15 and generate a profit. If dividends or interest are given out along the way, that's good, but they'll probably only make up a small part of the planned earnings.
Investing, on the other hand, is more concerned with long-term income. As a result, revenue generation, such as dividends and bond interest payments, becomes the primary focus. Do investors benefit from capital appreciation? Sure, but that isn't the primary motive, unlike in trading.
As previously said, many people mistake trading and investing for the same thing. Buying and selling have essentially the same mechanics. Sometimes the analysis used to arrive at such conclusions is the same. However, the goal and definition of objectives are what distinguishes trading from investing.
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