What are the differences and similarities between investment and trading? What are the advantages and disadvantages of these activities? In order to objectively answer these questions, first of all it is necessary to understand the meaning of the terms investment and trading, and then, to delve deeper into their features. And this information is in the article below.
What do these terms?
Trading is an active form of earnings, the process of buying or selling various assets on large exchanges (stock, commodity or financial platforms, for example in Hong Kong, Frankfurt or New York), as well as on small trading platforms which are available to a wider range of participants.
Thanks to developed Internet today there are many terminals for online trading. However, despite the novelty of this technology, the general principles of trading remained unchanged.
Investment is a passive way to make a profit, a procedure in which a person has to invest money in something in order to make a profit in the future. For example, the purchase of shares of companies, investments in the construction of new real estate, the wholesale purchase of goods for the purpose of their resale.
How do investors earn?
Investments are not available to everyone. This type of earnings is limited by criteria such as the size of the initial capital. In order to earn money investor need to invest a lot.
As a rule, experienced investors diversify deposits and manage risks. They seek a balance between high interest rates and risks. As a result, give preference to investments with an average yield.
As an example, if a person has 10 thousand dollars and the desire to passively earn a percentage, then for this he needs to find promising areas of activity in order to invest there.
After careful analysis and a long search, he invests $5,000 in promising start-up (expected profit of up to 50% per year), $3,000 in a PAMM-account (75% per year), $2,000 in a high-yield project that offered profit 1 % per day from a deposit without capitalization.
In a year, the investor will receive $22,050, including the initial $10,000. Net profit will be 12050 dollars or 120%. But this is an ideal case.
In life, everything is different. It may happen that the highly profitable project failed and the PAMM-account gave less than expected profit, only 50%. At the end of the year, the investor will receive $12,000 with the deposit, i.e. 20% of net profit. And this is an excellent result for investment.
However, large investors consider this percentage of profits to be high, which means such investments are risky. Acceptable profitability in this type of earnings ranges from 5 to 8% per year.
Advantages of traditional investments:
- passive profit without the need for constant participation and control – the investor can safely do other things;
- capital diversification is possible – for investors it is an excellent risk regulator.
- a relatively large seed capital (from one thousand to one hundred thousand dollars) – not every person can risk such money;
- it takes a lot of time: it can take several months or even years to get a 30% profit;
- possession of special competences in the field of investment for the selection of promising areas (there is practically no high-quality knowledge in the public domain).
How do traders earn?
The main advantage of trading is that it is available even to people who do not have large seed capital. The principle of this approach to earnings is very simple:
- the price increases – the trader should buy the asset cheaper in order to sell more expensive later;
- the price falls – the trader must sell the asset at a high price in order to buy it cheaper later .
Net profit is the difference in price over a period of time.
Newcomers to trading may seem absurd sale of assets, since the traditional investment approach eliminates any negative trend in the economy.
For investments, this is a loss, but for trade it is another opportunity to make money. That’s because traders trade special contracts, not an asset.
Such contracts assume the presence of a certain amount of goods, stocks or currencies, which allows traders to trade air. The option of selling assets at a high price and buying at low in trading is called a bearish approach which has existed for over 100 years in the futures market.
The main difficulty in trading is to obtain a correct prediction of asset price behaviour in the future (trend is up or down). The errors and inaccuracies of the analysis can cost the trader the money invested in the deal, and a successful forecast can bring up to 89% of the profits.
Advantages of trade:
- high yield in a short time – a trader can earn 85% of profit in 1 minute;
- small seed capital;
- the ability to actively manage capital – a market participant at any time can close an active option and avoid losing money;
- accessibility of training materials – a newcomer can learn the tricks and techniques for effective trading.
- requires constant monitoring of market behaviour;
- high risk of losing a deposit with an incompetent approach;
- trader need to constantly learn – on the Pocket Option platform there is an all necessary set of educational materials and a training account.
Thus, choosing the method of earnings between investment and trade, you need to navigate on the size of seed capital, risks and waiting time for profit.
If you have enough money and willingness to wait, then you can invest them. And if you have small the seed capital (from 10 to 100 dollars), but there is a desire to earn decently, then should pay attention to this way of earnings, as trading.