The difference between long-term plans and short-term moves in the world of finance.
If you’re remotely interested in financial topics, chances are you’ve seen adverts or social-media posts showing you how to build wealth through day trading or FX. I saw one TikTok that said you can turn $100 into $1 million in just two years by making just two percent profit every day. If it were that easy, wouldn’t the world’s biggest financial institutions be doing it?
Well, long story short, and you might have guessed, it isn’t that easy. But moreover, these people are changing their language to make you think trading is investing. These “finfluencers” are using terms such as “wealth building” to make you think of long-term, asset building, like a house or retirement fund. But this isn’t true. Trading is fundamentally about making a loss or profit, and, as you may have guessed, most people lose money. India’s SEBI says 93 percent of retail traders in the Futures and Options markets lose money and 67 percent of retail accounts lose money trading spread bets and Contracts for Difference. So what’s the difference between investing and trading?
Investing is the process of putting money into assets with the expectation of earning a return. The goal of investing is to grow your money over time so that you can reach your financial goals, such as retirement, a down payment on a house or paying for your child’s education.
Trading is the activity of buying and selling assets in an attempt to profit from short-term price changes. Traders typically focus on identifying and exploiting market inefficiencies in order to generate profits. They are more comfortable with taking on risk and are willing to make quick decisions to capitalize on market movements.
In short, investing is buying something to benefit from the increase in its value over the long term, normally a minimum of five years. Trading benefits from the price fluctuation of an asset to either make a profit or loss.
So, if I buy a stock for $100 and five years later that stock is worth $200, I’ve made a 100 percent return over five years, but the price may have moved a lot during that period. But let’s say I expect the stock price to drop from $100 to $98 in a 24-hour period, I may trade the stock or, essentially, put a bet on it falling in value. I could put that same $100 into that trade and make a profit if the share price goes in my favor. But if it doesn’t, I could lose it all.
Trading is short-term, energy-intensive and difficult to do consistently well. Investing should be long-term, slow and quite easy — set it and forget it. Investing also tends to be government-incentivized, offering benefits for you to invest money through your pension or retirement fund. Trading, on the other hand, is subject to capital gains tax on all profits.
Many people on social media are happy to show you how to get rich through trading for the price of an online course. The next time you see an advert like this, ask yourself, “if they are able to do this, why would they need to sell a course showing others how to do it?”
Investing, on the other hand, is a slow, long-term process. There’s no shortcut, but the results speak for themselves. The S&P 500 returned 216 percent over the last decade, compounding at 12.1 percent annually. So let’s say you earn a return of 10 percent over 35 years of work, where you invest $100 each month. Over the 35 years, you’d have invested $42,000 but you would have a total portfolio value of $379,663.81. That is the true difference between investing and trading.