3 Major Differences Between Investing and Trading

Trading and investing are two forms of financial interaction that are very similar in nature but differ 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 will 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 are between investing and trading and what that could mean for someone trying to decide 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 to day trader in the USA, 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 with, but it is generally recommended to start with at least 1000 US Dollars.

If someone new to the investing game is looking to buy their own stocks, the recommendation for starting with at least 1000 USD stands, as this is fairly standard advice in trading 101. It is important to note that investment does not necessarily mean having to buy stocks, it can also mean paying money into a mutual fund or other funds to gain returns through interest. This makes investing in some companies’ stock or funds rather affordable and easily done, especially if your method of investing doesn’t require the payment of commission to a middle man. Day trading on the other hand, requires at least 25,000 USD which many may not have.

Time Commitment:

Day trading requires at least 2 hours a day of time commitment, which is also something many don’t have, especially as the market 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 the markets are open all day long due to overseas markets and time zones, which could be attractive for someone looking to trade after their regular day job. Investing is far less time demanding, as most of the time is spent researching stocks and companies to fit whatever investment strategy you 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 to deploy 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 for you. 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 and 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.