As trading and investments have become more accessible to individuals from a host of backgrounds, it’s more important now than ever to understand the difference between these niches and how getting involved in either one can have an impact on profit potential.
The differences between trading and investing:
As trading and investing both have their pros and cons, the needs of the individual can determine which will prove to be the more worthwhile endeavour. At their core, both have the same aim: the individual will open an account, typically on a trading or investment platform, before buying and selling assets for profit. For each endeavour, there are multiple commodities, methods, tools and strategies that can be used, so there is plenty of potential on offer.
It’s important to keep in mind that both will have varying capabilities and risks, and being aware of best practices and regulatory compliance, guidelines set out by the FCA can help you to make a decision.
What is trading?
Traders aim to buy and sell stocks and other assets quickly and for financial gain. One example of this is day trades, where transactions are completed within 24 hours (and sometimes, for more profit potential, within seconds). There is a reliance on technical analysis and trading tools to assist with these endeavours when trading is the preferred choice.
What is investment?
Investors on the other hand have more of a focus on buying assets and holding them until a worthwhile transaction comes along. This can sometimes see individuals holding stocks for months and even years; the goal is to make the most profit available and build a portfolio for long-term results.
Which is the right choice?
When the differences are outlined, the decision to become a trader or investor may become a little clearer. The factors that can drive this are the individual’s investment style, the goals they hope to achieve and their risk tolerance. As the choice is often defined by preference, there’s no ‘right’ selection, but simply a determination of the one which will benefit the individual the most. Anyone with the time, dedication and capital can also do both.
Spread betting and CFDs
Both trading and investing have their own vehicles that can be used to make money and when you are hoping to use a financial asset or account to increase your wealth, it can take some research to define one that suits your needs. Let’s take a quick look at two trading examples:
Spread betting
This trading method focuses on derivatives. Two prices are given at the start of the trade; a buy and sell price. The spread/profit is determined between the two, so it’s the responsibility of the trader to find the most lucrative options and act on them.
CFD trading
In a similar way to spread betting, a CFD (contract for difference) is based on derivatives and is where a buyer and seller agree to trade an asset at the difference in value. This usually involves the seller making the contract, buying an asset for lower and then delivering it when the price moves in their favour.
You can learn more about the differences between spread betting and cfds here: CMC Markets
The risks of leveraged trading
Whether you are leaning more toward trading or investing, the selection will ultimately come down to your preferences. There are risks involved with leveraged trading just as much as there are in long-term investments, so the best thing you can do is research your options and get advice from a financial advisor or broker who has experience in the vehicles you are interested in.
Wikipedia. “Spread Betting – Wikipedia.” 22 May 2002, en.wikipedia.org/wiki/Spread_betting.
Disclaimer:
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk
of losing your money.
