The Pros and Cons of Trading vs Investing
In today’s day and age, there are seemingly more than one ways to skin a cat. Suppose you have some extra cash and are looking for a way to make it work for you by placing it in some activity for a good [return on investment]. You might consider trading or investing it in a high-growth stock for some time.
On the one hand, when you invest in stocks, you’re putting your faith in someone else’s hands and hoping they have your best interests at heart and want to see your money grow. On the other hand, when you trade, you have complete control over your money and the decisions that could see it grow or be lost, but you might not have the time. Both approaches have appeals and downsides, which we’ll highlight in this piece.
Trading
Trading involves timing the market for instances of price movements in short intervals for opportunities to buy or sell tradable instruments for quick profits. While investing usually takes years or several decades to see returns, trading is more active and takes less time. It usually deals with shorter periods, such as weeks, days, or in some instances, minutes.
There are two commonly used trading strategies: day trading and swing trading. This trading guide lists the best stock brokers in the UK and is an excellent resource if you’re starting. Day trading involves the buying and selling of tradable instruments during a single trading day. Positions rarely carry over to the next day, and traders open and close trades within the same day. In contrast, swing trading is the act of buying tradable instruments you expect to rise in value in a few days or weeks.
Pros
- Convenience- online trading and trading apps have made trading accessible and easy. You can quickly make trades and even monitor positions from a simple device like your smartphone.
- Good ROI- once you get good at trading, you can make a decent living and even comfortably reach your other objectives, such as saving for your pension.
- Price efficiency- unlike investing, where the price of instruments can be prohibitive, trading is much more cost-friendly and can even be more profitable if you buy derivatives.
- High liquidity- because of the high volume involved in trading daily, there is a high demand and supply of instruments, reducing risks.
- Price discovery- the demand and supply of instruments sets the prices in the market.
Cons
- Easy losses- losing your investment trading from a lack of experience or factors out of your control is easy.
- Taxes- you’re subject to high taxation rates for all profitable trades.
Investing
Investing is the act of buying assets or tradable instruments you anticipate to increase in value over time. It also involves holding the instruments over a long time and riding out the course’s ups and downs with the hope that they end up more valuable than when you started.
Investors rely on compound interest to build more value rather than the short gains experienced by traders from price changes. Furthermore, the shorter your investment period, the riskier the investment becomes.
Pros
- Grows with the economy- corporations and companies grow as the economy expands, which creates more jobs, increasing people’s purchasing power, therefore, making corporations more profitable. The longer you hold on to your investments, the more the effects compound.
- Mitigate inflation- Even though the value of investments drops during inflation times, they still tend to have a better annualised return than the annualised inflation rate.
- Convenient- the stock market and online trading platforms make buying and selling stocks easy. In addition, you don’t have to monitor the market constantly as with day trading.
- There are two ways of earning- you can either buy stock in a fast-growing segment and take advantage of short-term gains. Or hold your investment and wait for a company’s earnings and stock price to rise.
Cons
- High risk- if a company is poorly managed or goes out of business, you can lose your entire investment.
It takes long- you must first research a company’s history and future prospects to determine if it’s a good investment. Furthermore, you must wait for years and sometimes decades to finally realise your gains.