As I’ve explained in several articles and videos, there is a very big difference between investing and trading. In this article, I focus on which one is a better choice.
First, we need to get one fact straight: if anyone gives a definitive answer that one is better than the other, they are most likely saying this without having the full facts, or they may just be answering from their own point of view. Either way, don’t take such answer seriously until you’ve gone through your own process of assessing which one suits you.
So, how do you decide? Well, let’s break it down into easier to digest smaller steps.
Let’s start by looking at investing. As explained before, you can either invest a lump sum or invest a regular amount (for example, every month) in a portfolio that will grow over 20 years or more for a big pay day at the end, or leave it for your descendants to inherit after you’re gone. This is long-term “growth investing“.
The second type of investment is one that one can live off, or “regular returns investing“, and it requires a large initial investment to be put into a portfolio that generates regular high returns.
As for trading, there are two main types, the first of which is what is called “swing trading“. The trades of this type should usually be built on fundamentals with a discrepancy between current price and fundamental value, as well as have a future catalyst that would help drive the price towards the fundamental value. These trades can last for several weeks or even months. Some people also call them “short-term investments”, although it is a wrong term, since they are just trades.
The second type of trading is “day trading“, which is also known as “short-term momentum trading”. This type just follows market momentum, still with clear catalysts to drive price in the direction of the momentum, but not necessarily in the direction of fundamental value. These trades can last from just a couple of minutes to several days, and they usually involve leverage in order to get the most out of the move, since the move is usually not that significant if no leverage is used. Yet, by using leverage, this is a very risky type of trading that needs much stricter risk management.
Now, which one of these is best? The right answer is: it depends. It depends on the following:
- How much money you’re starting with
- Do you have regular income already that you want to contribute part of to the portfolio
- What is your time horizon
- What is your ultimate goal
- How much are you dependant on the amount you’re starting with
- Are you planning to get regular income from the initial contribution
For some people with very little money and no prospect of contributing more money to the portfolio, it would be rather unfair to expect them to act in a similar manner to someone who has a significant starting amount. Moreover, whether they have a regular income that they’re saving from or not would have a great impact on the decision, and how long in the future they can wait for the returns to appear is also key.
Please check some of my other articles in the “Portfolio Education” section for further explanation and ideas on how to build your own portfolio of investments and trades according to what suits you, as well as how to manage risk. If you want to read them in a logical order, maybe start with the “investing & trading strategies explained” article, followed by “portfolio construction” and then “portfolios entries, exits, and rebalancing” articles.
The process needs to always follow the correct steps to do it right. You can find the “full 8-step process” and other articles to clarify the right approaches in the “investing & trading process” section.
I wish you all the best!
(Written by Hassan Afifi)
Please note that we do not provide any financial or investment advice. All the material shown here is for educational purposes only, and we only mention the author’s own personal opinion and approach for such educational purposes. If you would like to invest or trade, we urge you to do your own research and to seek professional advice from qualified investment advisors.