Investing vs. Trading

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Many people are increasingly turning toward the fastest way to make money in the financial markets.  Their time horizons during which they plan to realize gains in their investments are getting smaller and smaller.  As their patience shrinks, they enter different realm of financial arena called trading which might not have anything to do with the principles of investing.  Sincerely, anyone who plans to realize profit from transactions in financial markets within a month, a week or a day is trading, not investing.  Below you can find some points worth considering if you are looking to enter that zone, a trading zone.

Learning curve

Good investments always make good sense and do not require great time to study them.  Principles of investing can be acquired by reading a book or two on basics of evaluations and diversification.

Yet trading is much more challenging. Sometimes reading a whole library of books concerning different techniques might not be sufficient as experience and discipline play a crucial role in obtaining long term trading success.  Thus, trading on a paper without risking any money constitutes obligatory second step.   For those that want to jump straight in, they risk acquiring very sobering and losing experience.

Time requirement

Naturally, the time to become successful in investing, including following the news and their progress is miniature compared to time required to trade.  Thus, anyone should initially decide how much spare time they have.  If it is less than few hours a week, they should just orient themselves to long term investing.

Possibility of gain and a probability of a loss

Investing sincerely can not match the returns obtained by trading.  However, in an efficient market, higher possibility of gain can only be achieved by accepting higher risk.  Trading thus carry elevated risk, but nobody should trade to average 5-10 % a year that most investments hope to generate.  Many traders actually average multiples of those amounts. And the lure of those huge gains is actually a main driving force that constantly draws new blood to the financial arena.

Psychological factor

Underperforming investment can put pressure on investors, but if they are properly diversified that stress can be kept to the minimum.  That is not the case with trading.  Time factor exerts enormous amount of pressure and brings out emotional reactions on every turn.  Losing can entail feelings of devastated, and winning can feed you with intoxicating euphoria.  Thus, controlling all of those emotions becomes a crucial part of trading success.

Many may choose to look at this issue from a risk aversive point of view thinking that only the safest of investments should be considered.  That may well be so for the strategy of capital preservation but serves very poorly for those that want to accumulate new capital and maximize their returns.   For them, mixing some of the trading strategies with long term investments may prove far more satisfactory.