Differences Between Investing and Trading
Investing and trading are often confused, just like investing and saving sometimes are. However, there are quite a few major differences between the two. The commonality is that generally you do both in order to try generate a positive return - ie. make a profit. You would also normally invest or trade in financial assets like shares. The biggest difference between the two concepts is how long you intend to hold the asset for.
Trading is normally done with a very short term mindset - you buy something you think will go up in price very soon and then you can sell it at a profit. Or if you want to "short" an asset in the belief it will go down quickly, you can also make money that way. We explained short selling and some of its pitfalls in this article. Traders attempt to take advantage of assets that are temporarily mispriced or if their analysis shows that the asset will continue going up or down.
Unless you are quite a skilled trader, trading can be very risky business and you could make losses very quickly. This is why many traders use a stop-loss which means that once an asset hits a certain price, they sell it so as to not lose too much. You need to pay constant attention to what is happening in the market!
Also, in order to make proper money trading you either need to be trading high Rand amounts or use leveraged instruments in order to inflate your return. Leverage is great when things are going well, but if they aren't - your money can get wiped out very fast. Leverage (like CFDs) allow you to put up only a fraction of what it would cost to normally get exposure to a certain asset value - ie. instead of buying 100 shares that cost R100 each (R10,000) you could only put down R1,000 (a margin of 10%). If the share goes to R110, hey presto your initial R1,000 is now worth R2,000 (the R10 is profit and you have exposure to 100 shares so your position is R1,000+R1,000). But if it goes to R90, you have lost all your money (your position is R1000 - R1000) and unless you have a stop-loss you could lose a lot more.
Depending on the platform you are using to trade you could be paying fees on every buy and sell trade which eat into your potential profits. You could also pay a much higher tax rate on trading profits as they can be taxed at the same rate as your salary!
Investing is a much more long term activity - some say at least 3 years. But for someone just starting work and investing for retirement, they will be in the markets for around 40 years!
This is when you buy something that you also hope goes up in value but potentially you may not need to sell it, or at least have no immediate intention of selling. Also if the price drops drastically, you could potentially hold the asset and ride it out in the knowledge that you have the luxury of time and don't need to lock in your loss.
Investing also opens up access to some other assets such as property which you can't really trade given the lack of liquidity and high fees that come with buying and selling property.
You can also invest and forget if you are invested in quality assets - there is no need to keep paying attention to your portfolio and what's going on in the markets. Even if you have a long term mindset you can still invest in bad assets, so although time is on your side as an investor you need to invest in the right things. If the future is like the past, if you are invested in a quality low cost tracker fund (like the Satrix 40 ETF) you are more than likely to earn a good return in the markets over time.