There are two ways to make money from the capital market and the commodities market. Both methods are investing and trading. although similar But these two methods are very different that beginners should understand. What are the key differences? Check out the following checks.
Get to know investing and trading.
Investment is the process or activity of sacrificing current resources for future gains. The word resource here can be understood as money, energy, time and thought.
in other words Investing is not just buying stocks or instruments in the capital market. but also education attending training, etc., as long as you expect more rewards than the resources you sacrifice for these activities.
Trading in the language comes from English, which means buying and selling activities (Merriam-Webster dictionary). As with investments broad definition Trading is not limited to buying and selling assets in the capital and commodity markets. but also for transactions in general.
However, in this article, the author will focus only on investing and trading activities in capital markets (stocks, mutual funds, ETFs) and commodities (palms, cryptocurrencies, forex). It is more similar to the activities in these two markets than the actual transactions of goods and services.
Difference Between Investing and Trading
Although both expect profit from the transaction. But investing and trading are very different. Here are some differences between the two:
1. Time frame
The main difference between investing and trading is their time orientation. Investments are often aimed at long-term gains, be it 1 year, 3 years, or even decades in preparation for retirement funds.
On the other hand, trading tends to be very short and time consuming. Traders generally don’t hold assets for more than 3 months. There are different types of traders who sell their assets within seconds or minutes after they own it.
In addition to the differences in the above time frames The goals of traders and investors are also different. Traders focus more on short-term profits. While investors focus on long-term profits
It is not often that investors have their own objectives in investment instruments, for example to prepare pension funds. Tuition fees for children Marriage funds, etc. While traders focus only on short-term profits without worrying about the profits.
In addition to the goal Another thing related to time frames is risk. Trading is more risky than investing. due to the change in the price of financial assets such as forex or stocks will be more severe in the short term Let’s look at an example of the change in value of the Jakarta Composite Index (JCI).
At the time of writing, the JCI price is down 1.87% in one day. However, for a year, the stock index on the IDX has increased to 16.87%. The logic is that if the short-term and long-term volatility of the JCI price are the same, then the price volatility is the same. It should only take 8 days for JCI to increase 16% or decrease 16%.
In addition to indicating that the profit potential in the long term is somewhat lower than in the short term. This also indicates that the long-term risk is lower.
4. Actor Profile
The difference between traders and investors is also in their profiles. Why is that? The reason is that with high risk and short term goals. Traders are usually the ones who have proactive risk profile (Risk-seeker). This is definitely different from the investor’s risk profile. This varies between conservative, moderate, and high risk.
In addition, trading accounts usually need to be opened with a margin account. Opening a margin account requires up to Rp 200 million (CNBC). This amount of capital is not owned by investors with minimum capital, is it?
5. Analysis techniques
The 5 things that differentiate between investing and trading are analytical techniques. because the long-term ownership Investors need analysis of basic conditions issuer (company or government) as well as to do technical analysis This is because the issuer’s basic conditions determine whether the investment in the issuer can last for a long time.
On the other hand, traders tend to focus on technical analysis Of course, because profit size depends on short-term price changes, however, it is not uncommon for traders to have better technical analysis skills than investors. Therefore, experienced traders are often referred to as market analysts.
There are many trading terms that don’t really exist but have different meanings to investing. For example, the word many In forex trading, 1 lot equals 100,000 units of currency, while 1 lot in stocks equals 100 shares. The discourse states that IDX will convert 1 lot into 1 share.
Aside from lots, other terms that you should understand are pip, spread, and many others, not to mention the fact that each trading instrument has different characteristics. Therefore, the terms used must also be different.
in the opinion of the author The difference between investing and trading lies in the type of instrument. In this case, it is generally not traded for a mutual fund instrument (mutual fund), since the price of this instrument (NAV per unit) is generally set at the close of the market. only Therefore, it is somewhat less liquid for traders.
Another investment tool where trading does not touch time deposit investments. The reason is because the deposits are managed by the bank and the returns are only visible at the end of the month or the beginning of the month.
It is generally traded for other instruments such as stocks, forex, cryptocurrencies, ETFs, bonds or derivatives (CFDs). The reason is that the price changes of these assets can occur in minutes, hours or days.
Investing vs Trading: Which is Better?
In response to the above question You should consider the following factors:
- risk profile. If you are a maniac when the stock price falls. Trading is not the right activity for you.
- time This can be used for trading, especially day trading, scalping and forex trading. It often takes a lot of time to observe market conditions. Therefore, this activity is not suitable for those who still have a full-time job. Now there are trading robots. But human beings still have to formulate the strategies implemented by robots.
- capital. as mentioned above Opening a margin account for stock trading requires approximately 200 million capital. There are forex brokers that offer trading without deposit. But still, when trading generally takes a decent amount of capital. in order not to be hit by a margin call
- knowledge. As mentioned above Traders tend to have good analytical technical skills and have to manage their own assets. This means that if your investing and trading knowledge is not enough. You should invest first while cultivating knowledge.