12 April 2023 • 16 min read
Investing and trading are two popular approaches to the financial markets, each with its own unique set of benefits and risks. However, if you're looking to make money in the stock market, it can be difficult to determine which strategy is best suited to your individual goals and risk tolerance. Should you focus on long-term investing, or opt for a more active trading approach?
In this article, we will explore the key differences between trading and investing, and help you understand the pros and cons of each strategy. We will examine the different types of investors and traders, the time horizons involved, and the tools and techniques used to make investment decisions. Whether you are a seasoned investor or a novice trader, this article will provide you with the information you need to make informed decisions about how to allocate your resources in the financial markets.
We will begin by examining the basics of investing and trading, with cryptocurrencies being used as our example in order to illustrate our points. We’ll then briefly explore some of the key factors that drive returns in each strategy, while also looking at the differences in risk and reward between the various approaches before concluding with some basic questions to help you decide whether you’re more a trader or investor (or even a mix of the two).
Within the context of finance, trading refers to the buying and selling of financial instruments such as stocks, bonds, (crypto)currencies, commodities, and derivatives, among others, with the goal of making a profit from short-term price movements.
Traders use various tools and techniques to analyze market trends, identify patterns, and make predictions about future price movements. They may use fundamental analysis, which involves analyzing economic and financial data to determine the intrinsic value of an asset, or technical analysis, which involves using charts and other technical indicators to identify trends and patterns in price movements.
Traders have a variety of trading styles at their disposal, including day trading, swing trading, and position trading, among others, each with different time horizons and risk profiles.
It should be noted that trading can be a high-risk, high-reward activity, and requires a significant amount of knowledge, experience, and discipline to be successful.
Investing, on the other hand, is a long-term strategy that involves buying and holding an asset (or assets) for an extended period of time. Investors aim to profit from the long-term growth of the asset by holding it for months, years, or even decades (!). This approach requires a deep understanding of the underlying technology, market trends, and risk management.
More specifically, investing refers to the act of allocating resources, usually money, with the aim of generating profits or returns over time. Investing typically involves buying assets such as stocks, bonds, real estate, or other financial instruments in the hope that they will appreciate in value and generate a return on investment.
Investing can take many forms and involves different levels of risk and potential reward. Some investments, such as stocks and cryptocurrencies, can offer high potential returns but also come with higher risk. Other investments, such as government bonds or savings accounts, are generally considered to be lower risk but also offer lower potential returns. Overall, investing is an important tool for building wealth over time.
There are a number of key differences between crypto trading and crypto investing. Let’s recap a number of the more salient ones below.
The most significant difference between trading and investing is the time horizon. Crypto trading is a short-term strategy that involves buying and selling cryptocurrencies within a short period, usually hours or days. On the other hand, investing is a long-term strategy where investors hold cryptocurrencies for an extended period, usually years, with the expectation of making a profit in the future.
Trading requires a high level of knowledge and skills in technical analysis, market trends, and risk management. Investing, on the other hand, requires a more fundamental understanding of the technology and the long-term potential of the cryptocurrency. Trading relies on technical analysis and market trends to identify short-term trading opportunities. Investing relies on fundamental analysis and a deep understanding of the underlying technology and market trends.
Since trading involves short-term buying and selling, it tends to be more risky and requires a higher risk tolerance than investing. Trading involves making quick decisions based on market fluctuations, which can lead to higher profits or losses. Trading carries higher risk than investing, as traders need to manage their positions carefully and be prepared for rapid price fluctuations. Investing carries lower risk but requires patience, discipline, and a long-term view of the market.
Traders aim to generate short-term profits by buying and selling any of the thousands of cryptocurrencies based on market trends. Investors, on the other hand, aim to generate long-term profits by holding cryptocurrencies that have the potential for growth over time.
Crypto trading can generate high profits in a short period, but it also comes with high risks. In contrast, investing tends to have lower potential returns in the short term, but it also comes with lower risk and higher potential for long-term gains.
Trading and investing are two different approaches to the financial markets. With an eye on the crypto market, let’s take a brief look at some of the tools to get started. Note, that while these examples are guides to the world of crypto, they can be similarly useful in the traditional world.
There are several popular and effective investing strategies that investors use to maximize their returns. Since Trality offers automated trading and investment options within the crypto space, we’ll focus on cryptocurrencies, but virtually all of these strategies can be (and are) used when investing in other assets.
The idea behind HODLing is that cryptocurrency investments can be very volatile and subject to sudden fluctuations in value, but holding onto them for the long term can result in significant gains. Instead of selling during a downturn, HODLers believe that the best strategy is to hold onto their investments and wait for the market to recover.
Given its popularity within the crypto space, HODLing is often the subject of some of the funniest crypto memes.
Dollar-cost averaging (DCA) is an investment strategy that involves investing a fixed amount of money at regular intervals, regardless of the market conditions or asset prices. This means that an investor buys a predetermined amount of an investment, such as a stock, bond, or mutual fund, on a regular schedule, regardless of whether the price of the investment is up or down.
For example, an investor may decide to invest $100 per month in a particular stock over a period of time, say six months or a year. If the price of the stock goes up, the investor will be able to purchase fewer shares with $100, but if the price goes down, the investor will be able to purchase more shares with the same amount of money.
The idea behind dollar-cost averaging is that by investing regularly, the average cost of the investment over time will be lower than the average price of the investment over the same period. This is because the investor will be able to buy more shares when the price is low and fewer shares when the price is high. It is a way to reduce the impact of market volatility on an investment portfolio and potentially lower the overall risk of the portfolio.
Passive income in investing refers to income that is generated with little or no effort on the part of the investor. Passive income is typically generated from investments in assets that produce recurring income, such as dividends from stocks, interest from bonds, or rental income from real estate.
Passive income is often viewed as a desirable form of income, as it provides a steady stream of income without requiring active involvement from the investor. This can be particularly attractive for those who want to supplement their regular income, save for retirement, or build wealth over the long term.
Passive income can also provide greater financial security and flexibility, as it can provide a steady source of income even during periods of market volatility or economic uncertainty. However, it is important to note that passive income is not entirely without risk, as market conditions can still impact the performance of income-generating assets.
Crypto investors looking to generate passive income can do so in a variety of ways, including staking, yield farming, and liquidity mining, making earning passive income in DeFi particularly attractive to investors.
This revolves around researching and investing in assets with strong fundamentals, such as a solid development team, real-world use cases, and a strong community. Someone committed to the environment, for example, might invest significantly in the most energy efficient cryptocurrencies.
An index-following strategy (sometimes referred to as passive investing) is a strategy in which investors seek to replicate the performance of a specific market index, such as the S&P 500 or the Nasdaq Composite. This strategy involves investing in a portfolio of stocks that closely mirrors the composition of the index, with the goal of achieving returns that are similar to those of the index.
The main advantage of an index-following strategy is that it provides broad exposure to a specific market index at a relatively low cost. It also allows investors to benefit from the long-term growth of the market, without having to pick individual stocks or make frequent trades. Investors have various options when it comes to index-following, for example exchange-traded funds (EFTs), mutual funds, and direct investments.
In terms of crypto, investors can invest in Trality’s automated index tracking portfolios are diversified baskets of crypto assets that re-balance automatically and provide you with a simple, reliable and maintenance-free way to gain exposure to the crypto market.
While there are areas of overlap in the venn diagram of investing versus trading, there are certain strategies that traders use in pursuit of short-term profits. Again, the emphasis here will be on crypto, but these strategies are actually imported from traditional trading.
Day trading is a type of trading strategy in which traders open and close positions within the same trading day, with the goal of profiting from short-term price movements. Day traders use technical analysis, such as charts and indicators, to identify potential trading opportunities and make rapid trading decisions based on those indicators.
Day traders often use leverage to increase their potential profits, which can also amplify their losses. They typically focus on highly liquid markets, such as stocks, currencies, and futures contracts, where prices can change rapidly and frequently throughout the trading day.
Day trading requires a high level of skill, discipline, and focus. Traders must be able to react quickly to changes in market conditions and manage their risk effectively, often by setting stop-loss orders to limit potential losses. They also need to be able to make quick decisions based on technical analysis, and to stay emotionally detached from their trades.
Within crypto, traders aim to profit from short-term price movements and close all their positions before the end of the day. There is often a debate among crypto traders as to whether day trading or swing trading is a more profitable strategy, to say nothing of the best time of day to buy crypto.
Swing trading is a type of trading strategy that involves holding positions for several days or weeks in order to profit from short-term price movements. Swing traders seek to capture gains from market swings or price fluctuations that occur within a trend, rather than trying to predict long-term market movements.
Swing traders typically use technical analysis to identify short-term trends in asset prices and to time their entry and exit points. They may also use fundamental analysis to gain a deeper understanding of the factors that may be driving price movements.
Swing trading can be a flexible strategy that allows traders to participate in the market without requiring constant attention and monitoring. It can also be less risky than day trading, as traders have more time to react to market movements and can set stop-loss orders to limit potential losses.
Margin trading is a type of trading that allows investors to borrow funds from a broker or exchange to purchase assets that they might not otherwise be able to afford. Margin trading enables traders to amplify their potential returns, but also increases their risk exposure.
In margin trading, traders deposit a certain amount of money, called "margin," with their broker or exchange. The broker or exchange then provides additional funds, often up to a specified leverage limit, that the trader can use to purchase assets.
Margin trading involves the use of leverage, which magnifies both potential gains and losses. If the value of the assets purchased with borrowed funds declines below a certain point, the trader may receive a "margin call" from the broker, requiring them to deposit additional funds or sell off assets to cover the losses.
Within crypto, a trader borrows funds from a cryptocurrency exchange to increase their purchasing power and trading volume beyond what they can afford with their own funds. As mentioned, margin trading allows traders to take positions that are much larger than their account balance, which amplifies the potential gains or losses.
Scalping is a trading strategy that involves making multiple trades in a short period of time to profit from small price movements. The goal of scalping is to capture small gains on each trade while minimizing losses, often by setting tight stop-loss orders.
Scalpers typically focus on liquid markets, such as stocks, currencies, or futures contracts, where prices can change rapidly and frequently. They may use technical analysis to identify short-term price patterns and execute trades based on these patterns.
Scalping requires a significant amount of focus and discipline, as traders need to be able to quickly identify and react to short-term market movements. It can also involve high trading costs, such as commissions and fees, as multiple trades are executed over a short period of time.
Arbitrage is the practice of taking advantage of price differences in different markets or among different assets to make a profit with no risk or little risk involved.
Arbitrageurs seek to exploit price inefficiencies that occur when an asset is priced differently in two different markets or when two similar assets are priced differently. They will buy the asset in the market where it is priced lower and simultaneously sell it in the market where it is priced higher, making a profit from the difference in prices.
Arbitrage opportunities can occur in various markets, such as stocks, bonds, currencies, and commodities, among others. The speed of modern electronic trading has made it more difficult for arbitrage opportunities to persist for very long, as traders are able to quickly exploit such opportunities and eliminate any price discrepancies.
News trading is a strategy used by traders to take advantage of market volatility caused by news events. This strategy involves monitoring economic and political news, as well as corporate announcements and other events that may affect the price of financial assets, and taking positions based on the anticipated market reaction to the news.
News traders typically use fundamental analysis to assess the impact of the news event on the market and make trading decisions based on this analysis. They may also use technical analysis to identify support and resistance levels, as well as other indicators that can help them anticipate market movements.
News trading can be a high-risk strategy, as it involves making trades based on short-term market movements that can be difficult to predict. It can also be challenging to act quickly enough to take advantage of news events, especially in fast-moving markets. However, some traders find that news trading can be a profitable way to generate returns in the short term, especially if they are able to accurately anticipate market reactions to news events.
Be aware that the Securities and Exchange Commission (SEC) in the United States, for example, has placed restrictions on news trading and other high-frequency trading strategies in order to prevent market manipulation and protect individual investors.
Crypto traders, however, can use news trading, with the obvious sources of information being the usual suspects: news websites, podcasts, and popular YouTube channels, among other things.
Market making involves placing both buy and sell orders at the same time to provide liquidity to the market. Traders earn a profit from the spread between the bid and ask prices.
Market making is not typically a strategy that retail investors use. Market making is a specialized activity that involves providing liquidity to a market by simultaneously buying and selling an asset at different prices in order to profit from the spread between the bid and ask prices. Market makers typically operate in highly liquid markets and use sophisticated algorithms and trading systems to manage risk.
Retail investors, on the other hand, typically focus on buying and selling assets for long-term growth or short-term speculation, rather than providing liquidity to a market. Retail investors may use a variety of strategies, including value investing, growth investing, and momentum investing, among others, to achieve their investment goals.
While retail investors may encounter market makers when placing trades, they are not typically involved in market making themselves. Instead, retail investors may trade through brokers or online trading platforms that execute trades on their behalf.
While certain types of trading strategies (e.g., margin trading or arbitrage) can certainly be incorporated within a framework focused on a long-term approach to crypto investing, below are a few instances of strategies commonly used by both crypto traders and crypto investors.
Fundamental analysis is an approach that analyzes the underlying technology and value proposition of a cryptocurrency to determine its long-term potential. Traders look at factors such as the team behind the project, the technology, the market demand, and the competition to determine the value of a cryptocurrency.
Technical analysis involves analyzing the price charts and using technical indicators to determine the future price movements of a cryptocurrency. Traders use tools such as moving averages, relative strength index (RSI), and Fibonacci retracements to predict market trends, with the ability to read crypto charts being absolutely vital.
Trend following aims to identify trends in the market and trading in the same direction as the trend. Traders use technical indicators such as moving averages to identify trends and make trades based on the direction of the trend.
Traders who use a short-term or medium-term trading strategy can still use index investing to take advantage of broader market trends. For example, a trader may hold a position in an ETF that tracks the S&P 500 index to capture the overall direction of the US stock market, while also making shorter-term trades based on technical analysis or news events.
Conversely, investors who take a long-term approach can also use index investing to build a diversified portfolio of stocks that closely mirrors the composition of the index. This approach can provide exposure to the overall market, while minimizing the risks associated with individual stock picks.
Now that you know far more about various characteristics of trading and investing, which term best describes your own approach?
What is their main objective? If your primary goal is to hold onto your assets for a long-term investment, then you are likely an investor. If your primary goal is to buy and sell assets in order to make short-term gains, then you're a trader.
Investors tend to take a long-term view and are willing to accept higher levels of risk in order to potentially achieve higher returns over time. Traders, on the other hand, tend to focus more on managing risk in the short term and may take a more cautious approach. Nevertheless, both investors and traders can benefit from using risk management tools such as a stop-loss order.
Investors typically make fewer trades and hold onto their assets for longer periods of time. Traders, on the other hand, may make multiple trades per day or week, buying and selling assets in response to market movements.
Investors may focus on a particular asset or portfolio that they believe will perform well over time. Traders may use technical analysis, fundamental analysis, or other strategies to make short-term trades based on market trends and other factors.
Investors may have a deep understanding of the underlying technology and fundamentals of the assets in which they are investing, while traders may have expertise in technical analysis, market trends, or other areas related to trading.
Where does Trality sit along the trading–investing spectrum? The short answer is that Trality offers powerful, innovative automated options both for crypto traders and crypto investors, whether you’re interested in renting market-beating bots quickly and easily on the Trality Marketplace or creating your own bots using our Python Code Editor.
Interested in margin trading? We’ve got you covered with our margin trading functionality. Prefer investing in index-based bots through copy trading in order to minimize long-term crypto risks, then our Marketplace bots are for you. Looking to mix and match investment and trading strategies? You can do that and more with many of Trality’s creator and investor features.
However, it’s crucial to understand the risks with both trading and investing. Whether you opt for one or the other, you should never take unnecessary risks if you cannot afford to do so (or if those risks are based on an incomplete understanding of the actual strategies involved). Hence, unless you are knowledgeable and can afford the risk, you should start off with investing in order to gain experience without the potential for significant losses. Only after you’ve become comfortable with investing should you then move into trading, if you’re inclined to do so.
While Trality began its journey in 2019 as a platform devoted to crypto trading, we’ve always been firm believers in the long-term future of crypto, particularly since the space has enormous potential for widespread adoption. Whether it’s the many benefits of decentralized finance or the continued development and implementation of blockchain technology, one thing is clear: crypto is here to stay. And Trality will continue to evolve, providing investors with tools to increase their long-term returns.
As we’ve shown, trading and investing are two distinct approaches, with each one having its own benefits and drawbacks.
Traders can take advantage of short-term price movements and generate profits in a relatively short amount of time. However, it requires a significant amount of knowledge, experience, and skill to be successful, and can be risky due to the high volatility.
However, investing involves holding investments for a longer period, with the expectation of achieving long-term growth and profitability. It can be a less stressful approach, as it doesn't require constant monitoring of the market, but it also requires patience and the ability to weather market fluctuations.
Ultimately, whether you choose to trade or invest will depend on your personal goals, risk tolerance, and level of expertise. As always, it's absolutely vital to do your own research, develop a sound investment strategy, and be prepared to adapt to changing market conditions in order to succeed in this promising and dynamic market.