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Understanding the different terms used in the financial markets is key to developing the skills needed to achieve your financial goals. Something that should be clarified right from the start is the difference between investing vs trading. 

Discover what investing and trading are, as well as some of the crucial differences between the two, to help you decide which might be the better fit for you.


The terms “investing” and “trading” are often used interchangeably. Both involve opening an account with a broker, and buying and selling financial assets, such as stocks, ETFs, commodities, indices or cryptoassets

There are key differences between the two approaches, however, and clarifying what lies behind the “investing vs trading” debate will put you in a better position to successfully meet your personal objectives.

Investing vs Trading: A Comprehensive Guide to Making Informed Decisions

What Is Investing?

What Is Investing?

Investing involves buying assets with the aim of making a long-term financial return. The length of this process will depend on your individual circumstances . Some people invest to achieve financial independence and retire early, whereas others invest to fund education or celebrations, such as weddings. Regardless of the aim, investing usually involves following a strategy with an investment time horizon of at least a year.

Investors will usually choose assets that they expect to increase in value by the time they are ready to convert their investment back into cash. There are no definitive rules about which assets should go into an investment portfolio, and diversifying your portfolio across different asset classes is an option that many experienced investors choose.

The assets themselves are not the factor that distinguishes investing from trading. Instead, the major difference is the length of time for which you hold them.

Tip: Active investors use tools, such as fundamental analysis , to establish the intrinsic value of an asset to try and make market-beating returns. Passive investors are more likely to buy assets, such as ETFs and indices, to gain exposure to the broader financial market, rather than outperforming it.

What Is Trading?

What Is Trading?

Trading involves buying and selling securities within small time frames, usually ranging from seconds to weeks. Trading is more speculative than investing and involves the implementation of short-term strategies.

Traders tend to focus on which direction an asset’s price is likely to move, rather than the reason behind it. These moves might be driven by shock news events or other momentary pricing anomalies, which can be explained by technical analysis.

Trading requires active management of positions and the monitoring of news feeds. Traders are also likely to use risk management techniques, such as stop-loss orders, to automatically close out losing trades, rather than waiting for them to become profitable again.

Tip: Trading demands a lot more time and resources than investing. Administrative costs, commission and fees also tend to be higher because of the greater volume of trades being made.

What Are the Key Differences Between Investing and Trading?

What Are the Key Differences Between Investing and Trading?

The major difference between investing and trading is the length of time for which a position might typically be held. Investing can involve strategies with much longer time horizons, whereas traders aim to make profits from short-term price moves.

“Trading involves ‘timing the market,’ whereas investing is all about ‘time in the market’.”

In addition, traders and investors set up, and engage with the markets, in different ways. The research required is different for both approaches, as are the risk management tools utilised.

Investing Trading
Holding PeriodLongShort
Trading FrequencyLowHigh
Portfolio DiversificationYesNo
Time Required to ManageLowHigh
Importance of Fundamental AnalysisHighLow
Importance of Technical AnalysisLowHigh
Stop-LossesUnlikelyLikely
Funding StylesRegular subscriptionsOne-off deposits
Use of LeverageNoYes
Short SellingNoYes
CFDsNoYes
Buy-and-HoldYesNo
Market conditionsAllHigh volatility

Final Thoughts

Trading and investing have many similarities, and explaining the difference is best done with a commonly used phrase in the finance industry: trading involves “timing the market,” whereas investing is all about “time in the market.”

Find out more ways to trade and invest by heading to the eToro Academy.

Quiz

Which of the following best describes a typical “trader” (rather than a typical “investor”)?
They tend to hold assets for a shorter period of time, usually between minutes and days
They tend to hold assets for a longer period of time, usually between months and years
 

FAQ

What is the difference between investing and saving?

Investing involves putting some of your capital into assets traded in the financial markets. When you start investing, the value of these assets may or may not increase in value. On the other hand, saving offers more certainty regarding returns. For example, putting money into a bank savings account with a fixed rate of interest will guarantee a pre-agreed percentage increase, but with no possibility of outperforming this interest rate.

Are there different styles of investing?

Investing styles are primarily split into two different approaches: “active” and “passive.” The former tries to generate returns that beat the broader market. The latter aims to track the general price movements of a benchmark index, such as the FTSE 100 or S&P 500.

How does tax work on investments?

Your personal circumstances will determine whether you pay tax on investments. It’s important to consider the tax codes that apply to you and whether you’re able to take advantage of any “tax-free” schemes, such as ISAs, which are offered by governments to incentivise investing.

This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.