The accessibility and growth of financial markets in the last decade made trading and investing an attractive alternative source of income. Nonetheless, to get the most out of your capital you must establish an approach to the markets in accordance with your goals, otherwise, you might be disappointed.
Should you invest or should you trade? While this decision can be taken only on a personal level, there are a few elements that can help you make the best decision.
What is the difference between trading and investing?
When trading, your goal is usually to make a profit in the short term by buying a financial instrument at a low price and selling at a high price. Most brokers allow for alternative strategies to make profits by providing tools that help you maximize the return of your capital (e.g., leverages or shorts).
When investing, instead, you are adopting a long-term strategy where you try to buy an instrument at a low price and hold it for a long time until it reaches a high value. Some assets like stocks also provide other forms of revenues (e.g., dividends). The goal of investing is usually to make money in the long time and not a quick profit.
When to prefer trading to investing
For those looking to make money eventually, investing is the way to go. The critical part of investing is that you must know thoroughly the instrument you are buying. In fact, you should be as educated as possible before putting any of your own money into a company or other entity. This includes reading the company’s annual report and understanding their financial statements.
Successful investors know not only when to buy and sell, but also how much they are willing to risk and what other events could affect the price of a security.
For those who are excited about speculation and want to leverage their capital, trading is the best option. Traders are willing to take a chance on a security they believe is going to perform according to their scenario. If you speculate wrong, you risk losing money. However, if you speculate right, you can make a lot of money. Additionally, trading makes it possible to reap the fruits of proper trade instantly, as the return can be taken at any moment.
Benefits and drawbacks of trading and investing
Both trading and investing have their different risks. Trading can be done with stocks, commodities, metals, foreign currencies and cryptocurrencies through exchanges or CFDs brokers. For example, with CedarFX you can get exposure to 190+ instruments in a variety of markets and you can trade them all with leverage of up to 1:500 and 0% commissions. CedarFX created a flawless trading experience, and you can register with a minimum deposit of $10.
Additionally, trading can be very profitable if you master technical analysis (TA) and develop a personal trading strategy.
Although some investors debate that TA is not as effective as geopolitical or fundamental analysis, technical analysis remains the backbone for many successful traders, including hedge funds.
TA can be used to develop a broad strategy or focus on specific events like earnings reports. There are plenty of options for technical indicators like Moving averages, Fibonacci retracements, and support/resistance levels to help find trends in the market and place winning trades. Ideally, you want to mix them all to have the best outlook on the instruments you trade.
In conclusion, it is up to your goal to decide which is better for your situation. Investing can provide a steady source of income overall. However, it requires significant starting capital to have satisfying returns. Additionally, finding good investments takes time and can be difficult.
On the other hand, trading is more active and is better for leveraging your capital. When trading you do not need to know all the details of traded security as most of your actions will be based on analysis and trends. However, trading can be emotionally exhausting. In some cases, trading can be more exciting because you can act in real-time as the market changes and you will see the result faster than investing.
Alternatively, you can split your capital and do both. Your journey might begin with trading to let you familiarize yourself with the markets and, if you are successful, you can allocate part of the returns to sound investments you like.
To make the most out of your trade, the suggested platform is CedarFX. Open an account here.