Trading vs. Investing - Which Is More Profitable?
This article will focus on one of the biggest rivalries in the world of finance – which of the two earns you more money.
Keep in mind that these two are not entirely separate from each other. They have their similarities; therefore, you should not get confused between the two.
After reading this article, you should be able to make a distinction between the two, and most importantly, decide whether you want to become an investor or a trader. Ultimately, it boils down to your preference.
To start with, let us define the two first:
Definition of Trading and Investing
Trading is the act of buying and selling of financial instruments via an exchange or a broker. You can trade thousands of these instruments (currencies, commodities, indices, stocks, crypto currencies, etc.)
You can perform trading via small brokers or large exchanges such as the NYSE or NASDAQ. With the advent of the Internet, trading has slowly transitioned into the online world via online exchanges.
Investment, on the other hand, is a process where an individual or a group invests money in something expecting a profitable return from it in the future.
The investment can be done in any sector or any good that has a monetary value. This can include commodities, land, companies, digital assets, various and goods and services.
From the definition, we have found the major difference between the two. Investment includes trading within itself. When you invest in an asset and buy/sell it for profit in the future, you are effectively trading.
As per Binomo, the popular options trading platform, here is what you can expect to earn when investing or earning:
Earnings From Investment
Investors look to invest in the things that earn them a profit in the future. The rate of profit increases in proportion with risk. That means higher profits equal higher risk.
Investors, thus, must be careful in deciding how much to invest, and the amount of risk they’re willing to undertake.
Therefore, they try to find a middle ground between profit and risk. The profit is enough to entice them to invest and the risk level is manageable so that they can recover from the losses.
Say, if the investor decides to allocate $10000 from his capital into various investments. No smart investor would invest his whole capital into one place. Therefore, he diversifies his portfolio and invests in different sectors.
In this case, he invests $5000 into shares of one of the top performing fortune 500 companies, $2000 into various currencies, $1000 in tech-startup, and the rest in gold.
Each arena has a different rate of return. In the best-case scenario, every investment of his turns out to be profitable and he manages to double his capital to $20000.
But in reality, this rarely happens as there risks and uncertainties involved with any form of investment. Say, some of his investments turn out profitable and some end up being a loss, and he earns $13000.
In this case, he scores a net profit of 30%. This is still a decent return. However, there are certain things to keep in mind while investing.
Investing is done on a long-term basis where they don’t need to actively monitor the progress. However, it will take months or even years to get the desired return.
Moreover, investing requires a huge investment of capital, so it might not be everyone’s cup of tea.
Now let us compare this the earnings of a trader.
Earnings From Trading
Traders have a different approach of dealing with their money when compared to investors. They don’t need to start with a huge capital.
A trader can start trading on different markets with as little as $300 and make crazy returns out of it, provided he knows what he is doing.
An advantage traders can enjoy is that they can trade the market in both the directions. That means, when the price of asset is expected to increase, they can buy the asset and sell it later at the higher price.
On the other hand, when the price of an asset is expected to fall, they can sell the asset and buy it back at a lower price.
Thus, even in the case of a falling market, traders can profit off it. This is where the hands of investors are tied.
It all boils down to correctly predicting the market. While investment is time consuming, a trader can expect to earn 90% return on a one-minute trade.
Therefore, it is evident that trading holds many advantages over investment. They can invest less, enjoy higher returns in lesser amount of time, and is it easier to get into trading than it is to become an investor.
In conclusion, for the average bloke out there, trading would be more profitable for him than investing.
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High Capital Risk Is Involved In Financial Trading