The world of investments may often seem confusing to the novice, making it more so when terms with different meanings are used interchangeably, as is the case with trading and investing. 

While the ultimate goal of both trading and investing is to make money, these methods use distinctive strategies that result in different potential returns. They also call for different capital requirements, time commitment, skills and personality.

Trading is a method of holding a financial instrument such as stocks or shares for a short period of time. Traders buy and sell fast to hit the higher profits in the market. Timing is crucial. Present performance of companies is scrutinised to hit the higher price and book profits in the short term.

Often, traders will dump what they perceive as losers instantly, while they will cash out on the best performers to take advantage of profit before these dip in price. Trading requires constant vigilance of the market and the trader per force must be ready to act at the most opportune moment.

It stands to reason that traders need to be skilled and technical individuals who time the market and watch market trends avidly so that they are in a prime position to obtain higher profits in a short time window. Trading involves a higher degree of risk and offers a greater potential for higher returns or losses due to the short-term rise and fall of the instrument’s price.

Trading involves a higher degree of risk

Investing on the other hand is an approach that works on a buy-and-hold principle. This means that investors invest their money for some years, decades or even longer periods. They will wait out the dips and highs of the market for as long as the outlook for these instruments is positive.

Buying and holding investments offers a more passive form of income and wealth generation. The mantra is that short-term fluctuations in the market are non-consequential for the long-term aims of the investor. Think of it as growing a plant – it takes time to develop and patience becomes of essence. Investors keep themselves away from trends and invest in value, for a longer period of time keeping a watchful eye on the investments they hold. 

The investing technique will deliver comparatively lower risk and lower returns in the short term but higher returns with compounding interests and dividends over the longer term.

Is there a right choice or balance?

The two strategies play an important role in wealth generation, as they provide for diversified portfolios. There is no right or wrong approach as it all depends on one’s personality traits, goals, capabilities and philosophies. Would-be takers of trading and investing need to determine the objectives and risk they are willing or capable of taking, their knowledge and experience and the sums of money involved.

Financial advisors are equipped with knowledge, experience and the necessary tools to guide would-be investors towards the options best suited for them.

This article is not, and nothing in it should be construed as an offer, invitation or recommendation in respect of investment products or services offered by the BOV Group.  Any views, assumptions or opinions expressed in this article are those of the author. The value of investments may go down as well as up and may be affected by changes in currency exchange rates. Past performance is not a guide to future performance.   

Rose La Rosa is financial advisor at Bank of Valletta.