Trading vs investing: what's the difference?

The terms ‘trading’ and ‘investing’ are often used interchangeably, but these practices are not the same. Discover the differences between these two methods in our ‘trading vs investing’ guide.

Trading vs investing: an overview

Trading and investing are both excellent ways to get exposure to financial markets, but they are very different and require a different mindset. When you invest, you are holding the asset for a long period of time, and you may have to accept substantial price declines along the way. The hope is that if markets behave as they have historically, you will eventually see returns. When you trade, you are speculating on price movements in the short to medium term – opening and closing positions more frequently, seeking smaller returns on individual positions, more often.

Basics of trading

Trading is the buying and selling of assets such as shares, forex or commodities over the short to medium term. The aim is to outperform returns you could get when investing by opening and closing positions more frequently in pursuit of short-term gains. When trading, you can speculate on an asset’s upward or downward price movements. If you think the price of the asset will rise, you buy and if you think the price of the asset will fall, you sell. The latter is known as short-selling; this means you are trying to benefit from a decline in an asset’s price. There are different trading styles, namely scalping, day trading, swing trading, trend trading and position trading.

A popular method of trading is via derivatives such as CFDs. When you trade using derivatives, you do not own the underlying asset and you can trade on leverage. With leverage, you only have to put up a small deposit – called margin – to gain exposure to the full value of a trade. While this will magnify profits, it will also magnify losses.

Balancing your risk is a very important part of trading; that is why you need a solid strategy and trading plan before you start. You also need to do a proper fundamental and technical analysis on the markets you want to trade. You can learn more about trading strategy, risk management and different trading styles on IG Academy.

Basics of investing

Investing involves buying assets, usually shares, ETFs or bonds, and holding them in the hopes of growing your capital over time – through price appreciation and benefits such as dividend payments, interest and voting rights (depending on the asset type). Investors in fixed income aim to receive a yield that is higher than that available from a savings account, while accepting more risk. Unlike trading, you cannot make a profit if the price of the asset drops, because you own the physical asset and the aim is to sell at a higher price.

Investors can buy shares or ETFs via a share trading account. For example, you can buy Apple shares and hold on to them until you think it’s a good time to sell. An ETF is a form of investment fund that you can buy or sell on a stock exchange. It tracks the performance of a sector or an index. For example, instead of buying shares of individual agricultural companies, you can buy shares in a single ETF and get exposure to the entire agriculture sector.

If you want to invest in shares or ETFs, you need the full value of the investment upfront. Remember, the value of your investment can fall, and you may get back less than you invested. That’s why it’s important to conduct thorough analysis before you invest any of your capital.

Key differences between trading and investing

Trading Investing
Method Derivatives trading is popular. You don’t take ownership of the underlying assets, so there are tax benefits1 Stocks and ETFs can be bought via a share trading account. When you invest, you take ownership of the asset
Strategy Buy to sell (go long), sell to buy (go short) Buy to hold
Timeframe Short to medium term Medium to long term
Analysis Technical and fundamental Fundamental
Profit On falling or rising prices Only on rising prices
Initial capital required Deposit (margin) Full value of the investment

Decide how you want to gain market exposure

Only you can choose whether trading, investing or a combination of the two is best for you. The first step is to decide whether you want to speculate over the long term, or if you’d rather take advantage of short to medium-term price movements.

Next, consider your risk appetite – if you choose to trade shares, for example, you can limit your risk to your initial outlay by investing; this is not always true when trading, especially with derivatives where losses may exceed initial deposits on individual positions. Trading and investing can also have different tax benefits.1 So, do your research and decide how you want to gain exposure to the financial markets.

Open an account

Open an account with a relevant trading or investment provider – this could be a broker or an exchange. If you are interested in share trading, CFD trading, you can open an IG account in minutes and get access to thousands of markets.

Open an account with IG

Build a trading plan

You need a trading plan and risk management strategy in place before you start trading or investing. A trading plan is a comprehensive blueprint covering your goals, strategy, motivation and attitude to risk, through to risk management rules and analysis of past trades. A risk management strategy is a set of rules that could lessen the impact of a loss.

Open, monitor and close your first trade

If you’re trading, you decide whether the price of your chosen asset will rise or fall, and then buy or sell accordingly. If you’re investing, and you’ve decided which shares to buy, you can start monitoring your investments online via our share trading platform and sell at any time. You can also collect dividends and reinvest these all in one place.

Trading vs investing: summary

We’ve summarised a few key points on the differences between trading and investing below:

  • Trading and investing are different practices, but they are both great ways to get exposure to financial markets
  • Trading is about buying and selling financial assets – usually in the short to medium term. You can speculate on and profit from rising or falling prices, trade on leverage and you don’t own the underlying asset
  • Investing involves buying assets such as shares, generally to hold them over a longer period. You can only profit if you sell after prices have risen, need the full value of the investment upfront, and take ownership of the shares
  • You can deal shares or trade CFDs with an IG account

1 Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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