Financial Market Basics: Trading and Investing
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The financial market is one known way of growing wealth. With real estate, it has proven over time to be a reliable way to passively multiply your money. While there are different instruments you can invest in, there are only two ways to profit from the financial market: trading and investing. Both methods involve being in the market for profit, albeit at varying levels of participation.
Remember Dogecoin, Shiba Inu, and Gamestop? Retail traders have been the talk of the financial markets in recent years. The trading mania was further amplified by the coronavirus pandemic, and it has made both the knowledgeable and news get more actively involved in the market. While this new influx of traders have been pumping liquidity to the market, the percentage of those making money from trading remains the same; 5% of all traders.
While neither trading nor investing is inherently wrong, trading is a more active way of market engagement. It seeks to profit from market volatility by entering and exiting positions in short time frames. Investing, on the other hand, is more long-term and involves simply buying and holding, and perhaps increasing one’s position.
Adept people in the market recognize the importance of these two methods of market engagements and advise proper allocation of funds to both trading and investment. In this article, we will look to simplify the two different strategies, identify when they are important, and list their pros and cons.
Introduction to Trading
When you hear the phrase “to the moon”, What do you think of? Trading or investing? Someone once answered “Investment Trading” and to an extent, the person is right. It requires buying to hold, but the purchases are short term. The gap between trading and investing has been reducing by the hour. Different intertwining strategies have called for a run back to the basics.
What exactly is trading? Trading is an assertive method of making market purchases. Many factors influence trading, such as momentum, low share price, high or low volume, perceived industry growth, and even social media recommendations. Trading is typically risky, and investors regard traders as risk takers. Regardless, they are no less of an investment strategy than investing itself.
Platforms such as Redot also provide additional technical tools to increase the likelihood of profiting from trades, and their risk management features allow you to place a trade and take profit or stop profits even when you are physically unable to do so.
Introduction to Investing
Investing looks at a longer time frame than trading. It goes with the strategy of “slow and steady,” and it does this through buying and holding various investment instruments to keep for a long period. There are times profits or dividends are issued to the investor. Because of the long-term plan, these extra gains are reinvested into getting additional pieces of the asset.
While traders are concerned about volatility and technical analysis, investors focus on fundamental analysis and continue to buy as long as the fundamentals remain unchanged. Volatility allows investors to average up or down, and corrections are viewed as an opportunity to increase the number of holdings.
Trading or Investing: Which Better Suits Long-Term?
If you are looking to be in the market for a long period, trading might not be your best strategy. The two types of trading, Day trading and Swing trading, focus on making profits over short time frames. Looking at history, the probability of making repeated wins is very slim.
Statistically, over 95% of trades run at a loss on any trading day, but the number of traders continues to increase. The skill sets and psychological prowess required by trading make them unsuitable for new entrants and those willing to be less involved in the market.
Even if you make profits in trading, the transactional costs from trading are unattractive. Trading fees and taxes are two major expenses known, and some brokers and exchanges have hidden fees. In addition, each buy and sell order is placed against many other traders and high-frequency machines.
Does this mean that people hardly profit from trading? No. Trading is the more popular option for participating in the cryptocurrency market, since it is inherently volatile. Some of the best trading platforms in the world also offer near-zero fees to trade your favorite cryptocurrencies.
On the other hand, investing can also be risky for long-term goals. Investors can buy an asset at its highest point before a correction. It might take years before the token gets back to its purchase price, and often, they rarely do.
It is advisable to apportion a percentage of your portfolio to trading and investment, as one will cushion the effect of the other. The profits made from trading could also be invested to keep the long-term plan in view.
Evergreen Tips for Long-Term Investing
If you are a long-term investor, there are some basic rules you must understand .:
1. Don’t put all your eggs in one basket.
The simple explanation for this is ‘diversify.’ You should invest in several assets at a time. That way, you are spreading your risk over several assets and will protect yourself when one sector collapses.
2. Do your research.
Before you invest, you should take advice from various sources. The crypto market is full of news and speculators, from Reddit to Twitter. While some of this information can be helpful, you should make your investment decisions based on what you are convinced about. You worked hard for your money; you won’t want to waste it on some uncanny recommendations from strangers.
3. Monitor your investments against the market index.
Not all your investments will do well. In Fact, a study showed that of every 10 assets you buy, only about 4-5 would be winners. It would be best to learn to fund your winners and ditch your underperforming assets. The goal is to make money in the long run, and a bad investment choice that is left untouched will result in further losses. Remember, the market does not show any emotion, so you should not approach it with any emotional tendency.
4. Stay in the market.
Downturns and corrections are part of the game. Although the temptation to remove your money during a correction is very common, the better choice is to see downturns as opportunities to acquire more quantity. Like we said earlier in the article, repeated trading fees are what you would want to avoid as an investor. Do not be moved by fads and fashion, and remember the words of seasoned investor Warren Buffett; Be greedy when others are fearful, and fearful when others are greedy.
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