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Both investing and trading can make you money, if you know how to do it the right way.
Before we talk about which one is better, let’s first look at the similarity and difference between the two.
Similarity Between Investing And Trading
First of all, a good strategy is not enough.
To succeed in investing or trading, you also need to have the following qualities:
- Discipline: It requires discipline to stick to your strategy.
- Patience: It requires patience to wait for the right opportunity.
- Consistency: It requires consistency to stay profitable for the long term.
Secondly, you have to be good at risk management.
Below is the risk of ruin table.
You can see that if you lose 50% of your entire account, you will need to make 100% to recover your loss.
Basically, the more you lose, the harder it becomes to recover your loss.
That is also why Warren Buffett famously said,
“Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No. 1”
And it applies to both investing and trading.
Difference Between Investing And Trading
Firstly, investing is generally about looking at the fundamentals of the company. As you are essentially buying a small part of a business, you have to assess whether or not it is a good business to buy and what is a good price to buy.
Whereas trading is mostly about looking at the price charts and movements. Generally, you use technical analysis to make your trading decisions such as whether or not you want to long or short the stock and at what price you want to enter.
Secondly, investors generally invest for the long term(i.e. at least for a few years), so they will hold onto their positions and ride out market volatility.
But, traders make money from market volatility.
They buy low and sell high, and buy high and sell higher.
Or they short-sell high and buy back low, and short-sell low and buy back lower.
The frequency of transactions is much much higher compared to investing.
Thirdly, investors generally don’t cut losses as soon as market goes against them. They will only sell their investments under these conditions:
- Stock has reached your desired returns
- Stock becomes overvalued
- Reason for buying the stock is no longer valid
- There are much better opportunities
- Portfolio needs re-balancing
However, traders need to cut their losses quickly when their judgement of the market direction is wrong. Before they enter a trade, they should already know their cut-off point and take-profit point.
Trading Is Riskier Than Investing?
There is risk in both.
But, is it true that trading is riskier than investing?
You can manage your risk in both trading and investing.
For example, if you set the maximum dollar loss to be the same for both, then the risk you are taking is essentially the same.
The riskiest thing you can do is to start trading or investing with no idea about what you are doing.
Investing Or Trading?
So, should you invest or trade to make money?
Which one is better?
Or should you do both?
The answer depends on YOU.
Ask yourself these questions:
- How much interest do you have for each?
- How much time do you want to allocate for it?
- Do you have what it takes to succeed in it?
- Do you have other good options if you cannot do it yourself or are not interested in doing it yourself?
- Does it help you achieve your financial goals?
For example, if you don’t have any interest in either one and don’t want to put any time in it, then what other good options do you have for each?
Also, which one is more aligned with your financial goals?
Let say, you want to grow your wealth passively and steadily for the long term. Then, a good option for you is to invest in index ETFs on a regular basis for a long period of time.
Here’s another example.
You have passion for trading and want to make extra income from trading.
But, you are working at a full time job.
Then you can learn a profitable trading strategy that can suit your schedule.
Practice trading on demo account until you are ready to use real money to trade.
Lastly, investing and trading are not mutually exclusive.
It’s not an either-or situation.
You can invest and trade at the same time, as long as it suits your situation and is aligned with your financial goals.