Let’s make no bones about it: choosing between trading and investing is a tricky task. There’s a daunting amount of – sometimes contradictory – information out there, countless variables to be taken into account, and any number of questions to be asked. And, after all that, there is no right answer. The truth is the right choice for you will depend on any number of personal and practical factors – there is no overarching correct path and it is far from black and white.
Having said that, it is very much possible to distill the information and make an informed and considered decision based on your individual and personal circumstances. Here are our top four key factors that simply must weigh heavily in your decision:
At the top of the list because if you don’t have enough of it you should immediately disqualify yourself from trading. Yes, trading requires a very significant input of time. We’re talking about a minimum of a couple of hours a day reflecting peak market activity five days a week, to full-time hours, or even more. If you’re not willing or able to put in the minimum hours you will struggle to make solid returns or – worse still – you could take a severe capital hit as a consequence of not being able to optimally manage your trades. Conversely, if you can only invest a handful of hours a week, or even a month, you’re in no way disqualified from investing. Choose your investments wisely, monitor them weekly or monthly, and then sit back and play the long-game.
2. Financial Resources and Goals
Trading and investing should be looked at very differently depending on the amount of capital you have at your disposal and your precise goals for said capital. Needless to say, entering either the trading or investment worlds without a robust strategy is very unwise. Your strategy must include deployment of capital, specific trade triggers, and a detailed breakdown of your financial goals. Dig into the best options for the capital investment you’re looking to make. Take advantage of online broker reviews to get the absolute best value from your trades. Research the commissions you’ll be paying in as much detail as you can, and be ready to siphon off a much heftier percentage of your capital if you’re trading as opposed to investing. The trade-off for this, as well as the longer hours you’ll be putting in, is that trading has the capacity to provide you with quicker and higher returns. As a general rule of thumb, daily returns of 0.5% to 3% on capital are achievable when trading. Whereas, when investing, if you’re consistently hitting 10% returns per annum you’re in very respectable territory.
3. Your Individual Personality Traits
There is one characteristic you cannot have too much of in either trading or investing and that is discipline. This is the foundation on which sticking to a coherent, winning strategy is built, whether trading or investing. However, other personality traits can act as a good guide to whether you would be better suited to trading or investing. Consider your general temperament. Are a you a patient type with a long-term outlook? If so, investments might be your game. Or are you always on the lookout for quick-wins and almost instant-gratification? Maybe you would struggle to stick it out during those turbulents times for the longer-term gains you should be aiming for with a buy-and-hold investment. Which ties in nicely to our fourth key factor.
4. Risk Tolerance
It’s absolutely crucial to think about your aversion or openness to risk. Trading on a daily basis, potentially dozens of times, often involves assuming a much greater risk than investing for the long-run in blue-chip stock. Although you can take advantage of stop losses to mitigate your risk in trading, get your strategy or decisions wrong and you can lose more than you invest. On the other hand, in almost all investments you have to show a willingness to ride out the troughs with a steady hand and stable, long-term perspective. A different attitude towards and tolerance of risk is required for trading versus investing.