Trading and investing are two very different and particular ways of trying to profit in the world of financial markets. The aim of investing is to slowly build up wealth over an often extended and specific period through the process of buying and then holding a portfolio of mutual funds, stocks, bonds, or other types of investment vehicles.
An investor will often work to enhance their existing profits through the method of compounding, or by reinvesting their dividends and earnings into more shares of stock.
Investment is often held for several years, even decades at a time and therefore availing of specific benefits such as interest, stock splits, and dividends. While the markets will fluctuate as time passes, an investor will ride out any peaks and troughs with the thought that the prices will eventually be rebound and any losses will be made up in due course.
An investor is usually more concerned with the fundamentals of a market such as a price/earnings ratios and management forecasts.
On the other hand, trading is where an investor buys and sells stock or commodities much more frequently with the aim of generating a return that outperforms buy-and-hold investors.
Whilst an investor may be more than happy with a 10% return on their investment each year, a trader is likely to seek a 10% return every month.
The idea behind trading is to buy a commodity or currency pair at a lower price and then to sell it at a higher price in a short timeframe.
In a falling market, a trader may also sell at a higher price and buy to cover at a lower price to balance their books. While buy-and-hold investors will wait for a more profitable position; a trader needs to make profits or take losses within a shorter period and then often use a protective stop loss to close out at a price level that has been predetermined.
There are different kinds of the trader, each of which is referred to by a different style which relates to the timeframe or holding period in which they buy or sell the stocks or commodities. They usually fall into one of four categories:
- Position trader: where the position is held for months or years
- Swing trader: where positions are held for days or weeks
- Day trader: where positions are held through the day but with no overnight positions
- Scalp trader: where positions are held for seconds or minutes with no overnight positions
Short-term investment options
Looking for short-term investment options? Here are a few suggestions.
Holding a short-term investment position in cryptocurrency means that you invest a sum in cryptocurrency and hold it for a short or medium term that could be anything between minutes, hours or months.
It is a very high-effort approach which enjoys the volatility of the market and allows the investor to profit from the often drastic changes in prices between short and medium timeframes. This investing allows a high percentage of gains and returns on your investments over the short-term period as the price movements of cryptocurrencies can be very drastic. It can, however, be slightly risky and stressful.
An investor that wants to invest in cryptocurrency in the short term needs to consider their goals and what they want to achieve, carefully. Only investing money you are prepared to lose, knowing which coins have short and medium term potential, and setting yourself daily and weekly targets for profits and losses are all important parts of the game.
It requires some technical analysis ability but can offer excitement and quick returns on investment, if you are lucky.
Not dissimilar to cryptocurrency trading, trading in forex is a good way of making a short-term profit on your investment. The forex market is where currencies are traded based on their fluctuating values against each other.
It is the largest and most liquid financial market in the world and each day trades around $4.9 trillion globally. The markets are open 24 hours a day, 5.5 days per week and you can buy and sell currencies whenever and wherever you want.
The market suits itself for both long term and short term trading and depending on what you want to get out of it. In the short term, it is wise to abide by a few rules. For example, never chase hot tips, don’t sweat if you make a loss one day, and focus on the future.
Remember that you win some, and you lose some, and if you look to the long-term while investing in the short term, everything will fall into place.
If you are not feeling particularly adventurous, but you still want to make a return on your investment, then you should consider investing in a savings account with bank or credit union.
When you deposit savings, it is more than likely that the bank will insure it so this makes it a very low-risk investment for those that are a little nervous of the possibility of being parted from their cash. The other good thing with savings accounts is that you can deposit and withdraw money as and when you wish without incurring any penalty.
These types of accounts pay interest on the money that you deposit although these rates tend to be lower than on other types of short-term investment options such as certificates of deposit.
For a slightly higher rate of interest, you can opt for a high-yield savings account– the type that is often offered by online banks. As they are not subject to the same level of overheads that a traditional brick and mortar bank is, they can afford to provide a much higher rate of interest.
Long-term investment options
When it comes to long-term investment options, here are a few popular options for you to consider.
A stock represents a slice of ownership within a particular company, and a shareholder will invest in the stocks of a company with the expectation that the company will grow and the value of each stock will increase, resulting in a profit.
In the long term, investing in company stocks is a good way of accumulating wealth and profit.
A good example is: If you had invested $100 in the Standard & Poor’s 500 index on the 1st of January 1928, by the end of 2017 that same $100 would be worth $399,885.98. This doesn’t mean that stocks go up all of the time though. During the financial crisis, S&P 500 lost 38.5% of its value in 2008 alone, meaning any shareholder would have lost profit, rather than gained it.
Another example would be that of Apple. In December 2002, one Apple stock was worth $1.02 on a split-adjusted basis. In March 2018, the same share was worth $176.21 resulting in a huge profit for anyone that had invested in Apple stocks, early on.
The key is knowing how and when to investing in companies, and this is a challenging skill to master. Even with reliable companies that are full of promise, the stock market is notoriously unpredictable.
Long-term investment in cryptocurrency is often referred to as ‘hodling’, and it relates to investing in one-off or regular sums of cryptocurrency and holding the investment for a long time, usually a one-year plus. Investors usually set another condition that means they will not cash in their investment until that condition has been met.
This is a very low-effort strategy, and it is based on the assumption that the price of a coin will rise in value over the long term, despite short-term fluctuations.
Despite the fact this is an easy and passive way of investing, it doesn’t mean that the investor should not set some goals. Consideration should be given to whether the coin has the potential to be a long-term winner when you invest, and what your conditions are for pulling your profits.
Again, you also need to be prepared to lose your investment as there is no guarantee that you will make your money back in the long or the short term as it is impossible to predict which way the cryptocurrency market will go.
Interest Paying Bonds
While stock represents the ownership of a slice of the underlying company, a bondholder is a creditor of the issuer- in other words, those that hold the bonds are lending money to the issuer.
A bond is purchased with the expectation that the bondholder will receive interest that is paid on a regular basis. This tends to be several times during a year, and then they will receive the face value of the bond itself which is usually $1000, once the bond is redeemed.
A bond can be bought or sold on the secondary market but this way, the price is often higher or lower than the price that was originally paid for it. The price and value of a bond often move inversely with interest rates which means that when the rate increases, the rate of the bond will decrease. If an investor is looking to hold their bond until it matures, this doesn’t present much of an issue.
The issue and risk with bonds are that a lot depends on the credit quality and reliability of the issuer and how much time there is until the bond matures. If the bond has a lot of time to reach maturity, interest rates can have a significant impact on its value. That said, bonds tend to be a lot less volatile than stocks and can, therefore, be a good diversifier in an individual’s investment portfolio.
A mutual fund invests in bonds, stocks and other types of investment. A mutual fund offers an investor a more diversified portfolio that is either actively managed by a professional investor or is passively managed where the fund tries to imitate the successful performance of an index such as the S&P 500.
The good thing about a mutual fund is that even a small-time amateur investor can purchase an investment that comprises of a range of different stocks and bonds and therefore offers instant diversification.
An Index fund can also provide a cheap way for investors to invest when compared to most actively managed funds which often demand high fees. For example, in 2017 it was found that only 43% of active fund managers outperformed passively managed peers and this was an improvement on the figure of 26% in 2016.
Where To Start?
Knowing where to start is often the most challenging part of the process. First of all, you need to consider your options carefully and engage the services of a qualified investment advisor if necessary.
Particularly in the case of long-term investments with substantial sums, it is wise to take advice from someone with the relevant experience. If you are looking at a more short-term investment, then you need to set some goals for yourself, as well as doing some significant research into what you are doing.
Remember never to invest more than you are prepared to lose, and do not borrow money from others, or banks to invest in cryptocurrency or forex.
Read more about Cryptocurrency Investing.