3 Major Differences Between Investing and Trading

Trading and investing are two methods one can use to profit from financial markets. They are similar in nature but different in execution. Your trading 101 knowledge will let you know that a trader is someone who buys commodities for a price and hopes to sell them for a profit as quickly as possible. And essentially, that’s what both traders and investors do - they purchase a commodity such as a stock with the intent of making money off of it. Traders look to profit short term by selling as soon as they can get a decent profit from the sale, whereas investors often opt to hold onto their stock in a company for a longer period of time.

Let’s cover some ground and look at what the key differences between investing and trading are, and what that could mean for someone deciding whether to try their hand at either of the two, or perhaps even both.

Capital Requirements

This is one of the biggest differences in investing, full stop. In order to be a day trader in the US, one needs to maintain an account balance of at least $25,000. If one decides that they don’t have that kind of money to use at the moment, they can look into trading Forex instead, which has no minimum required account balance to start; although generally speaking it is recommended for Forex traders to start with at least $1000.

If someone new to the investing game is looking to buy stocks, the recommendation for starting with at least $1000 stands, as this is fairly standard advice. It is important to note that investment does not necessarily mean having to buy stocks, it can also mean putting money into a mutual fund or other funds to gain returns through interest. This makes investing in a company’s stock or funds more affordable and easier, especially if your method of investing doesn’t require paying commission to a middle man. Day trading on the other hand, requires at least $25,000 which many may not have.

Time Commitment

Day trading requires time commitment of at least 2 hours a day, which is also something many don’t have, especially as the market’s opening and closing hours fall into the same time slots that most day jobs begin and end; making it virtually impossible to be a part-time day trader. One of the possibilities here is to go into Forex trading, where markets are open all day due to time differences with foreign markets. Forex trading could be attractive for someone looking to trade after their day job.

Investing is far less time demanding, as most of the time is spent researching stocks and companies to fit whatever investment strategy one might have. Even more time is spent building the strategy in the first place. This has the obvious benefit of being able to work on it whenever there’s free time. Someone with a lot of capital who’s looking for multiple opportunities should of course, be spending more time to analyse potential investments.

Potential Returns

Both day trading and investing have about the same ability to generate profit or loss. Day trading is obviously a lot faster and has the potential to grow quickly with the right research and time commitment. Of course, a day trading account can deflate as quickly as it can blow up. The recommendation is of course, that everyone invests for long-term profit; but if someone’s looking to grow one’s capital quickly, then day trading would be the right way to go as day traders can grow their capital by up to 10% per month, whereas investors are looking at 10 to 20% per year instead.

Summary of Differences