When it comes to financial management, most people falsely conflate investment with trading, assuming that the two terms refer to the same thing. Yet, trading and investing are two vastly different approaches to capital gains. One takes a long-term, passive approach whereas the other is a short-term, strategic means to profit off fluctuations in the economy.

Although both approaches have their pros and cons, most investors choose whether to trade or invest depending on their initial sum of money, the amount of time they have to dedicate to trading, and their knowledge of market trends. Before picking one approach over the other, take a moment to learn more about each and discover how they can help generate significant capital gains.

Investing 101

Investing is the process of allocating funds to an asset or security to receive periodic income or long-term capital appreciation. Essentially, when someone invests in a company, they buy a small share of the business with the hopes of earning a profit over time as the company grows.

For example, if someone purchases $1,000 worth of Apple stock today, they are investing in the company with the expectation that the stock price will increase as the company expands. By the time they sell their shares, they should be able to earn a profit higher than what they originally paid for the stocks.

There are many different types of investments, though, including stocks, bonds, mutual funds, real estate, and more. Many people choose to invest because it is a relatively low-risk way to generate passive income or grow your wealth over time.

Pros & Cons of Investing

• PRO: Relatively Low Risk—When an investor purchases stock in a company, they are buying a piece of that company, which means that their investment is less likely to fluctuate dramatically in value in the short term.
• PRO: Can Be Passive—Investing can also be a passive way to generate income. After an investor allocates funds to an investment, they can sit back and let it appreciate in value over time.
• CON: Takes Time to Generate Returns—One of the biggest disadvantages of investing is that it can take a long time to generate significant returns. For example, if an investor allocates $1,000 to a company today, they may not see significant returns for several years.
• CON: Requires Research and Knowledge—Before investing in a company, investors must understand the risks involved and have a good sense of a company’s financial health.

Trading Basics

Trading, on the other hand, is the process of buying and selling securities or assets in order to generate profits from short-term price fluctuations. For example, if an investor believes that the stock market will drop in the next few days, they might sell their shares before the market crashes and then buy them back at a lower price, pocketing the difference.

Trading is generally considered a higher-risk, higher-reward endeavor than investing. Although investors can make a lot of money by correctly predicting market trends, they can also lose a lot of money if they make the wrong call.

Pros & Cons of Trading

• PRO: Can Generate Quick Profits—One of the biggest advantages of trading is that it can generate quick profits. If investors correctly predict a market trend, they can buy or sell securities at just the right time to make a profit.
• PRO: Requires Less Money—Additionally, investors can earn substantial profits using significantly lower initial investments than long-term investors. For example, a trader can open a brokerage account with as little as $500 and start earning money within a day.
• CON: High Risk—As with all high-profit ventures, trading can be quite risky. If a trader makes the wrong call, they could lose a substantial sum of money within just a few hours.
• CON: Requires Active Monitoring—Another downside of trading is that it requires active monitoring. Traders must track market trends and make decisions about when to buy and sell securities. This can be time-consuming and stressful.

The Bottom Line

Investing and trading are two different approaches to making money in the financial markets. While investing is a long-term, passive way to grow your wealth, trading is a short-term, active strategy to make quick profits. If you wish to slowly grow wealth over many years, long-term investments will better suit your needs but if you prefer the excitement and risk of daily market fluctuations, you’ll prefer trading.