The Beginner's Guide to Trading vs. Investing
By - Dan Raju, Tradier CEO on
Apr 5, 2021 at 12:31:07 PM
In the past year there has been a surge of interest in trading and investing. People have had more time on their hands due to the COVID-19 pandemic, and there is greater access to the markets than ever before thanks to technologies that eliminate the need for the four walls of the traditional brokerage firm.
If you find yourself debating where to begin, it is important to know that there are many differences between trading and investing. They require different approaches and suit different people’s lifestyles and needs. Read ahead and learn which type might be right for you, especially as a beginner in the markets, as well as common misconceptions to avoid.
The two most common types of trading are swing trading and day trading. Individuals who trade on “swings” within the market try to identify opportunities where they feel a stock is critically under or overvalued and strike when the time is right. They pay attention to momentum indicators and trends over a period of time ranging from a few days to a few weeks.
Since swing trades can take a few weeks to develop before the trader dumps the stock, traders have some breathing room. For this reason, swing trading is a part-time job and highly suitable for those with a full-time job who are looking for a side hustle.
Day traders work on a shorter timetable than swing traders. Day traders make trades that can develop over a few hours or—at most—up to a day. Because they rely on short-term buy and sell signals, they are glued to their screens and trade at a high rate over the course of the market’s open.
A day trader usually won’t keep any securities or positions overnight, and many traders incur losses over their first few months. Becoming well-versed in day trading requires a lot of time and dedication, and those who go into day trading typically seek to make it a full-time job.
Investors aim to build their wealth gradually over the course of years, even decades. They buy and sell a variety of stocks, mutual funds, and stock bundles through sources such as ETFs. Investors often reinvest their profits and rely on slower methods of wealth building, such as dividends from stocks they own over a long period of time. Common types of investing include putting money into a 401(k) or an IRA.
Investors pay attention to market indicators that signal a company’s value, such as the company’s management forecast and price-earnings ratio. A benefit of investing is that investors don’t have to track their investments day-to-day; they just have to make sure they are making steady growth over a substantial amount of time. When a downtrend occurs in the market, investors can usually ride it out and expect to recover their losses when the prices rebound.
Avoid These Misconceptions
The biggest misconceptions are that 1) trading is easy, and 2) traders can easily be successful from day one. As with anything, the key to being successful in trading and investing is to have a solid plan and stick to it. Trading requires that you dedicate time, energy, and discipline to studying the markets and reacting accordingly. Day trading is especially immersive, and it’s important to strategize a day-trading plan that works for you and avoid straying from it.
Which Type Is the Best?
Another misconception is that there is a right or wrong answer to this question. In reality, what works best for you will depend on your lifestyle and expectations.
For those entering the markets as a beginner, investing is a great option since it has the longest time horizon. There is time to learn the markets and investing is generally low-risk and reliable.
Trading is more suitable for those who seek quicker gratification. If you’re yearning to make a full-time job out of trading, day trading is more aligned with your interests. If you want a more casual approach, you might find that swing trading is your best bet.
Seasoned Traders and Investors Do This
Successful traders and investors will tell you that sticking to a tried-and-true plan over a substantial amount of time is important regardless of whether you go into trading or investing. No matter what you choose, it always pays to be strategic and level-headed.
Don’t go at it alone! If you’re thinking about trading, gain some more insight into the specific habits seasoned traders utilize: https://blog.tradier.com/2021/02/five-essential-habits-seasoned-traders-build.html