Trading vs Investing
From. A personal, level you can say that invest in yourself if, you buy a book you, invest in your knowledge or if you exercise, you invest in your health in. Economic. Terms to invest, means, putting, your money your, assets, into. Financial, instruments. Such as shares. Profits, or a commercial, venture, with, expectation. Of achieving, a profit, so, if you invest you would expect, you investment to increase in value the. Range of potential. Investments. Is large you. Can invest in pension. Funds mutual, funds, bank, deposits. Stocks. Bonds. Rental. Property, real estate commodities. Gold, silver. Startup. Companies. Cryptocurrencies. You. Get the idea, from. Our previous units. We learned that financial. Trading is, the, buying. And, selling. Of. Financial. Instruments, in. Order to achieve a profit, so. On the. Surface, that. You sound similar, both. Are ways of putting. Your money to work and, the, goal for both is to, make a profit. Of. Course, they are not the same otherwise, we, wouldn't be talking about the differences. So. In this unit we, will cover. The. Key, differences. In five, categories. Time. Frame and timing. Risk. Leverage. And capital, requirements. Capital. Growth dividends. And compounding. Analysis. And strategies. Access. And tax implications. And, now let's. Get started. Time. Frame and timing. Time. Frame, the. First and most common difference, is the time period over which trading. And take place when. We talk about investing. We are normally, talking. About, holding, positions, over, a long time period, several. Months to several years even, decades. With. Trading, the timeframes are much shorter this, may be as short as a few seconds. On minutes but, generally. A few, hours to, a couple of days for short-term trades, and a. Few. Weeks to a couple of months, at the longer, end. Timing. Timing. Is the point at which you decide to enter a market the, shorter the time period, over which you, are trading the. More important, your timing, becomes, that. Is not saying that timing isn't, important, if you're investing long, term, timing. Your entry, is always. An important, factor, but, more so in in shorter, time frame. Obviously. If you're intending to hold something, for many years or decades your. Risk against. Short-term. Price volatility, is reduced, but not eliminated, a, common. Investment, strategy. For further energies, in timing, and volatility. Risk is called, dollar, cost, averaging. This. Is a strategy. Where, you will divide up your investment, over, a period of time and invest. A set amount at regular, intervals, regardless. Of what the market is doing this. Reduces, the impact of volatility. For that investment. Risk. Leverage. And capital, requirements. Risk. Both. Trading, and investing, involves, risk. Trading. Is viewed. As being riskier. Than investing. For several, reasons. Frequency. Of trades. Timing. Volatility. And. Leverage. The. First two we have just covered time frame and timing, trading. More often. Means, higher. Risk. And. Trading. At a lower timeframe. Increases. Our, exposure. To price, volatility. Leverage. And capital, requirements. Margin. Leverage. Is where the differences, between trading. And investing, becomes, significant. And where, a great, deal of the additional, risk is. So. What, is leverage, leverage. Is basically, trading, with money, you, don't have like. Taking, out a. Short-term. Loan. Brokers. Take, a deposit, from you this, is known as margin. And then, loan, you a multiple, of that amount with, which to, trade, this. Is referred, to as the leverage. Multiple. Of the margin, percentage. With which, is the same thing in this. Table you can see some margin, and leverage examples, now. You can get leverage that, is even greater than this, one. To 500, or more however. These. Are the typical, levels, you will be offered for, these products, then you open a trading account with a broker, in the U. This. Is due to regulation. That was put in place to protect retail, investors.
From The risk of, using. Too much leverage. Let's. Have a look at how this works in practice, we. Want to buy one. Mini. Lot of, Euro. Pound. One. Win a lot, equals. 10,000, of, the. Base currency. The. Price of one. Euro in, pounds. Is. Spot. 83. 1. So. To buy. 10,000. We. Will need. 8,000. 319. Spa 20. Pounds. Our. Leverage. For, this product, is 1, to 30. So. Our margin, requirement. Is. Eight. Thousand. Three hundred and nineteen, spa. 20/30. Equal. To. Hundred and, seventy, seven pounds. Now. To see the effect, of leverage, in action, let's, follow this example, through, the price. Increases. By one percent, from. Zero. Spot eighty three, one two. Zero spot. Eighty four. We. Have bought. 10,000. Units so. The value, is now. Eight. Thousand. Four hundred and, two, thirty. Nine that. Is profit. Of. 83. Pounds. Against. Margin. Requirement. Of two. Hundred seventy, seven, so. In one, percent, increase, in the price has, given, a. 30%. Profit, and, this. Is the first reason that leverage. Creates, risk, because. The opposite. Of the above is that a one. Percent, drop. In the price, would. Lead to a. 30. Percent, loss, of our margin. But. This is not the only reason that leverage, increases, risk, those. Of you who were paying close attention to, the example, I just used, will, have noticed something very important, that I missed out fees. The. Never open a trade you will first have to pay this, spread, or Commission. And if, you hold the treat overnight, you'll. Have to pay interest, on the money that, your broker has, loaned you to open, the trade, otherwise. Known as the overnight, rate, or swap, charge. Look at what this means using the example, of a one-to-one. Restored. Strategy. Your. Target, price is the, same distance as, your stop-loss. However. This. Is no longer true, then, you. Add the. Spread. In. This. Case a win, would, return, slightly. Less than a loss. Which. Means a break-even, trade. Would. Actually. Be a small, loss. These. Fees can have a big impact on, your profitability, because. Leverage. Also, works to multiply, the cost, of the fees, versus. Your margin. This. Difference, although small will compound, the more trades you undertake, in our, example. This spread, was a very. Small. Percentage, versus. The price. 0.01. Percent but. A higher percentage. Versus. The margin, 0, spot 3%, this. Means that in. 40. Breakeven. Trades, you. Would lose. 12%. Of your, margin. This. Is something, you should be aware of when. People are showing you their training, strategies. If. They are not including. Charges, then. They are not being honest. Trading. Is a probability. Game, and ignoring. This is a good, way to draw, your countdown, to zero. Investment. Risk in. Comparison. Investments. May seem much less risky. However. The, raziel, disc involved, in investing. If it's, not done correctly there. Are three main things to consider, when investing. Education. So. This, may seem obvious, but, I'll say it anyway just, because, invest. Staying is less risky. Than trading, it, doesn't mean that you should just pick investments. At random, if, you're going to do your own investments.
Rather Than through a financial, adviser then. You will need to educate yourself. To. Make good, decisions. Liquidity. Opportunity. Cost, we. Have covered, both of these in previous units with. Investments. Your capital, requirements. Are normally, a hundred percent of the amount you want unless no leverage, this. Means that you are locking up your money into, that investment. There. Is always an opportunity cost, involved, in that there. May, be a better, opportunity, that, comes by and because you are fully invested, you cannot take advantage of, it however. It is worth noting, that investing. Is a way, of increasing, capital. Over, time so. It is better than doing nothing with, it. Long-term. Investments. Can also often, be in liquid this, means that you may not be able to convert, it back into, cash quickly or if, you do you, may have to pay a liquidity, premium to, do so and sell at a discount, to the asset, value. Diversification. Risk. Diversification. Is. The most you strategy. For decreasing risk, in investments. It is, a very simple idea don't. Put all your money into just, one or a few investments, if, your investments. Are not, well diversified. Then, you stand the risk of losing money if the market, moves against. You. Diversification. Allows. An investor. To limit the risk by investing across. A range, of. Non-correlated. Assets. Classes. This. Means that a single market event will. Not affect, all of their investments. This is a balancing, act as the more diversified. A portfolio. Is, the lower the risk but also the. Lower the, return, will, be this. Is a topic, in its own right and I have added some useful, links in the description, if you are looking to find out more. Capital. Growth dividends. And compounding. Another. Significant. Difference between trading, and investing, is the intent, why. We, are trading. Investing. And the, effects, of dividends. And compounding. For. The most part investing. Being a long-term, game is about, growing your capital, over time, it, is about putting your money to work for you, so that you can draw on in the future, such, as in the case of a pension, as. Such, the goal for most people, when investing, is long-term capital. Growth for, future, income. In. Comparison. Trading, is seen by, many as a way of generating, income, not, capital, growth now.
It Is important, to note that the. Smaller, your. Capital. The more difficult is. To. Draw a sustainable. Income and, as. Such there should always be some proportion. Of capital. And invested, in order to build a sustainable, trading. Account. This. Is the typical view of trading, versus investing. However. There, are alternative. Strategies, for treating that some people, including myself, employ, this. Is to view your trading account as, part of a financial. Independence. Strategy. For. Those of you who are not familiar with, the concept, of F I it, is basically, live, within, your, means build. Multiple, income. Streams, save. Invest, compound. Repeat. In this. Strategy, because we have multiple income, streams or. Trading, is not yet a primary, income, stream. We. Can trade using. Risk limited, strategies. That. Aim to return. More, than investing. But, not pushing the, too far to try and take, an income, from a small, account, in this. Way we, look to build our capital. Over. Time. Dividends. One. Of the greatest benefits, of investing are dividends, and they're compounding, effects. Due. To the fact that in investing. You own the underlying asset. In the case of shares, this means that you own a. Part of a company, this, means that you are entitled to, a share of, the profits, of that, company. These, are distributed, by, companies, in the form of dividends. This. Payment can then be reinvested into. More, shares that earn more dividends, and so on this. Is called the compounding. Effect and is. Investing. Biggest. Advantage. Compounding. Starts slowly but, creates huge, benefits, over time, to. Add to this. Advantage. Most, brokers, will have an option for automatic. Reinvestment. Of dividends. At a reduced, or no fee. Active. Versus, passive and. Fees. As. We learned when. Talking about risk, traders, tend to be more. Active than, investors. This. Is another key difference between trading. And investing, in that there. Is no, way, to be a passive. Trader, but, there are many options for passive, investing. Passive. Investing, is an investment. Strategy of, buying and then doing nothing. Buy. And hold for the long term, this. Is often done in conjunction with, dollar, cost averaging. Where, a set amount is, misted, every month into the same investment. Or basket. Of investments. One. Of the most common, passive, investments. Is index. Investing such. As SM. You. May want, to be a. Trader. Or. Master. Investor. But, is worth. Noting, that in, recent, times, passive. Investment, funds have outperformed, the. Majority. Of active. Funds. Fees. I've, already. Covered the major impact, that this can. Have in trading, this. Is also true in investing. And can, actually, be worse. Because. Due to the long time very many people dismiss, a small. Charge, of 1% or more when investing. In. Reality. Over, 40. Years is. Small. 1%. Fee will. Reduce, the return, on your investments. By over. 25%. Huge. Impact. Analysis. And strategies. If. You. Are not going to go down the passive, route then you will need to have a strategy, and analysis, technique, for picking, your trades, on vestments. Investing. And trading will, differ in, how. This is approached there. Are two main types of analysis. Technical, and fundamental. In. General, investing. Will rely more on fundamentals. With some technical. And trading, will rely more on technical, with some fundamentals. We. Talked about this in more detail, in unit, 7 & 8 but, a brief outline, is that. Fundamental. Analysis. Analyzes. The intrinsic, value. Of an, investment, this. Looks at all the factors, that can, affect its, price this. Falls into two broad, categories, top. Down and bottom up, in the, example, of a company this.
Can Be looking at. Cash. Flow, profit. Margin. Company. Leadership is, a, bottom-up, approach a, top-down. Approach, at the widest, sector, and macroeconomic. Factors, such. As interest. Rates GDP. Price, of commodities. Etc. Technical. Analysis. Focuses, on analyzing the, past chart, patterns, of a. Product, volatility. And volume, to make predictions. On the future, price movements. Another. Difference, is that investing. Will involve, buying only, while, straining, will. Involve, both buying. Or, going. Long and. Selling. Or going. Short positions. Access. And tax implications. Closing. Out this module, it is worth noting, that trading, and investing, are normally. Treated, differently. In terms of regulation. And tax, I can't. Give advice on this other than to say do. Your, own research as. The, differences. Can be significant. And, will. Depend on, the country or. District. In which, you, live I. Hope. That you found this unit interesting. It is a surprisingly. Big topic, but very interesting, don't. Forget that there are blogs. On our website. For all our units, our next. Unit covers, factors. That impact, financial. Markets. Hi. This, is Justin here thanks for watching this video if, you enjoyed it or found it useful please, like share and subscribe and click that bell don't, forget to follow us on social media and visit our website now at trading comm for, more information, trading tools and future updates to help, to take control of your trading.