Investment and trading both involve the purchase of assets in the hope that they will appreciate in value. However, there are significant differences in these contrasting approaches with the prime differentiator being the time frame involved.
Investment is something everyone should be involved in to some extent or another. Many do not consider themselves investors, but if you own (or are purchasing in mortgage) your own home or have a pension plan or insurance policy then you are an investor and your financial well being depends on the performance of stocks and/or real estate.
Trading is a minority activity seeking to derive profit (income) from the short term buying and selling of assets, or put simply selling higher than the buying price.
Investment is a long-term endeavor. It may be for life, as in providing a roof over ones head, or over many years, as in putting ones kids through college or providing an income in retirement.
On the other hand trading is relatively short-term, ranging from day-trading where positions are opened and closed within the space of a day up to holding them for a month or longer.
Investments usually consist of holding actual assets, eg stocks, bonds, real estate Trading can mean holding assets but also consists of devices such as short selling (selling an asset you dont have in the hope its price will fall), making use of margin (or leverage - ie trading with borrowed money), foreign currency (FOREX) trading, and more sophisticated vehicles such as options, CFDs (Contracts for Difference), spread betting etc.
Investment is concerned with gaining both from an increasing asset price and the income gained from holding the asset (interest, dividends, rent). Trading is primarily concerned with profiting from movements in the asset price.
Trading is essentially a form of gambling, though hopefully a more informed (and less random) kind than the roll of a dice or the spin of a roulette wheel.
Investors generally rely on fundamentals in choosing investments, ie they look at the global and national economy, whats happening in a particular sector, and at the prospects for the asset under consideration. Traders do the same, but they also rely on technical analysis (chartism) which attempts to predict future price movements by looking at graphs or charts of historic prices. Theres absolutely no logical reason this should work, but charts do perhaps give a picture of market psychology, and more importantly are followed by many and as such may become a kind of self-fulfilling prophesy. Technical analysis tends to be used most for i) short-term (day) trading and ii) optimizing entry and exit points (timing).
The key point is to know whether you are a trader or an investor. As weve said investing is something that should be done by just about everyone, trading certainly is not. If you do decide to become a trader, make sure it is a conscious and informed decision. Study loads, and do lots of paper trading (trading with virtual rather than real cash - there are lots of trading houses out there that will let you set up practice accounts for this purpose). Find a system that works FOR YOU, and stick to it along with disciplined risk and money management.
Johnny Finnis is editor of personalmoneymanagement101.com a simple and unbiased introduction to finance and investment for ordinary people to make the most of their money. Have your say on our blog