Differences Between Investing and Trading

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Investing and trading are the two prime stratagems of profit-making from the financial market. During the recent pandemic, a lot of people jumped into trading and investing. Many traders became online sensations after their spectacular success.

Time horizon, mindset, and the ability to handle risks determine which option is best for you.  If you think like a business owner who wants minimal risks and long-term returns, then you should consider being an investor. Likewise, trading is for you if you aim for short-term profit and can keep up with the high-stake attribute of trading. The differences between investing and trading should meticulously be pondered upon before finalizing the future of your hard-earned cash. Here is our guide to help you along the way.

Investing

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Bonds, Stocks, Forex instruments, and Exchange and Mutual funds are some of the assets that investors buy. The unhurried appreciation – that could take several years or even decades – in the value of these assets enables the investors to bring about a tidy sum of money in the long run.

The risk of hitting a low in profits is inversely proportional to the length of the timeframe – the long-term investment horizons provide the greatest returns. Pulling off huge profits in investments requires a lot of patience and discipline. Also, a great deal of capital is needed for investment.

Instead of fretting over the currency’s value and its abrupt fluctuations, an investor thinks of his investment as his business and focuses on its overall performance – as long as it is moving on course.  Thorough research before investing is mandatory to ensure that despite the growing competition and risk factors, your business will keep on thriving. Philip Fisher remarked, “The stock market is filled with individuals who know the price of everything, but the value of nothing.” It suggests the significance of detailed research beforehand.

Trading

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Commodities, Stocks, Cryptocurrency, and Forex instruments are frequently bought and sold by traders over a short period. The goal here is to make quick bucks without holding the assets for too long; the holding period extends anywhere from months to even minutes.

Unlike an investor, who has to wait for years to witness a ten percent increase, a trader witnesses a ten percent upswing in the value of his assets within weeks – or even a day.

Forex trading is the most popular form of trading amongst beginners and experienced traders owing to its straightforward nature. Currencies are traded in pairs e.g. EUR/USD, where each pair is considered as a single entity. However, forex trading does not require the physical possession of currencies, you only have to trade the price of your desired currency against the other one, depending on the situation – an increase or decrease in the currency’s value could both be beneficial for you.

Usually, a trader’s account balance never falls to zero – or even below – because of the stop-loss feature in trading. When the instrument’s price decreases to a specific level – the trader decides this price himself – an order is issued to the broker to sell it as soon as possible. The asset then becomes a market order and is sold at the very next price available.

According to easyMarkets, a trader should commence trading (initial 3-6 months) with a demo account or until he can produce replicable results and conservative returns consistently. The platform also offer a free stop-loss facility to thier clients. You don’t need huge fortunes to dive into trading. With as low as $25, you can embark on your trading journey.

Learning how to trade Forex may take several years. Moreover, there are a few notes to keep in mind to become a secsusful trader:

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  • Always start with a demo account
  • Be disciplined in risk management
  • Everyone has different trading styles and opinions.
  • Stick to your own rules when entering or closing trade
  • Do not force trades.

Short and Long CFD Trading Explained

CFD trading is defined as “buying and selling CFDs”, where “CFD” stands for “Contract for Difference”

When trading CFDs, you can therefore speculate on price movements in both directions. So while you can mimic a traditional trade where you make your profits when a market goes up in price, you can also open a CFD position that makes profits when the underlying market goes down. This is known as a sell or “short sale” as opposed to buying or “buying”.

For example, if you think Apple stock will fall, you can sell a stock CFD on the company. You are still trading the difference in price between the time you open and close your position, but make a profit if the stock falls and a loss if it rises in price. In both long and short trades, gains and losses are realized as soon as the position is closed.

What is a margin?

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Leverage trading is sometimes referred to as “trading on margin”, as the funds required to open and maintain a position – the “margin” – make up only a fraction of the position’s total volume.

There are two types of margin when trading CFDs. A margin is required to open a position, while a margin may be required if your trade gets near losses that the margin – and any additional funds in your account – cannot cover. If so, you may receive a call for additional funds from your provider asking you to top up the funds in your account. If you do not put in enough cash, the position can be closed and the losses incurred are realized.

Final Words

A stock may be a big win in the long term and can cause a heavy loss in the short term. That’s why a trader has to keep an eagle eye on the market activities as well as scrutinize the fluctuations in price and charts almost all the time. For example, forex markets are operational in several regions having different – and sometimes overlapping – time zones. The activity of a respective trader during these hours isis determined by his choice. Impeccable technical analysis skills are required to succeed in trading. Due to this, people start with a demo account. Furthermore, a trader needs to pay keen attention to other traders’ thoughts as he has an ongoing competition with them too.

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