Trading and Investing

Another brief excursus in order to elucidate an aspect that very often becomes a source of incomprehension: the difference between trading and investing. Trading and investing are often used as synonyms, but they refer to two totally different practices. I am a trader, what I do is speculate on financial markets. I work specifically with Forex (currencies) and commodities (such as wheat, coffee and oil) and my operations have a duration ranging from a few weeks to a few months. So, I work in the medium term.

There are traders who work in the short term, with operations lasting up to a few days. There are those who do day trading, opening and closing an operation on the same day. And scalpers, who open and close many operations of very short duration (from a handful of seconds to a couple of minutes) that incur minimal gains, but that at the end of the day form an altogether nice sum.

Every trader has a different personality and a type of trading that suits him better than any other. However, all these ways of trading have one principle in common: they all try to take advantage of price movements, whether up or down. This is what the trader (and therefore me) does.

What interests the trader, therefore, is that the price of their financial instrument moves: in fact, the more it moves, the more there is an opportunity to have a rendering. But the more it moves, the more the risk of losing increases, obviously. For this reason, there are very important elements that the trader uses in his analysis, such as volume and volatility.

Volume is the number of stocks, bonds or contracts that have been traded during a given time period (e.g., in an hour, day, or week). Volatility is a measure of how much the prices or returns of an asset or financial product have moved over time.

The trader does not generally intend to buy or sell an instrument itself, but only to speculate on a price trend, earning if his predictions turn out to be correct. He, therefore, focuses more on the technical aspects of the financial instrument (be it stocks, bonds or futures) than on long-term opportunities.

Trading requires you to devote a lot of time to it, spending many hours in front of the monitor to check price trends and look for opportunities to open a trade. This amount of time is greater the smaller the time perspective of the operation is.

Trading is a real entrepreneurial activity that requires excellent knowledge of financial markets and lots of experience.

Investing, however, is a strategy that aims to increase capital over time and/or get an income. It means having a long-term perspective (at least 10 years).

An investor maintains his positions throughout the investment period, both during market upturns and downturns, rebalancing and correcting them when necessary (however, this doesn’t occur frequently), until he reaches his investment objective.

He is not interested in predicting how prices will behave in the short term, but rather is concerned with understanding the fundamentals of the company or instrument in which he has invested. Therefore, the investor will possess that instrument materially, whether these are actions, bonds or quotas of a fund.

Investors are required to spend little time on their investments precisely because of their long-term view, meaning they don’t have to check performance at every moment. I don't spend more than two hours a month checking, evaluating and possibly changing my investment portfolio.

Compared to trading, investing has an additional advantage: the ability to diversify your savings more. A diversified investment portfolio has positions in many companies, sectors and geographic areas: diversity helps you seize more opportunities and, above all, enables you to decrease the risk of the impact of some bad investment on savings.

For example, stocks are great in times of economic growth, commodities are good for guarding against rising inflation, and gold and some currencies, such as the Swiss franc and Japanese yen, are useful in times of recession. All together, they can create a balanced and protected portfolio.

Investing means defining a multi-year plan to reach one's life and investment goals (supplementing one's pension, having an annuity, paying for one's children's college, etc.), and requires respecting it over time whilst trying to reduce risks as much as possible.

Ultimately, although both refer to the financial markets, trading and investing are two different worlds, with totally different characteristics and objectives. Trading is earning from speculation; investing is obtaining a periodic return from one or more financial instruments.