Although two very different wealth creation genres, both trading and investing are an attempt to profit in the financial markets. Investors buy and hold assets with aim to achieve larger profits over an extended period, while traders enter and exit markets frequently to take advantage of market movements, making smaller profits along the way. We discuss the fundamentals of trading and investing in the following paragraphs.
What is Trading?
Trading is the concept of the buying and selling of goods and services, or a transaction between parties where the buyer offers a form of compensation to a seller. In crypto, it is the buying and selling of crypto assets. Assets traded in a financial market are called financial instruments or securities — Stocks, bonds, currency pairs, cryptocurrency or derivatives like options and futures. Traders use technical analysis and are often short-term as they make more frequent transactions to generate returns that outperform buy-and-hold investing, making traders risk-takers.
Trading profits are generated by buying an asset at a lower price and then selling it at a higher price later on within a short period. In contrast, traders can also profit by selling an asset at a higher price and then buying it to cover at a lower price, known as selling short, during bearish markets. In a cryptocurrency landscape, at times traders trade with crypto derivatives such as perpetual swaps to manage their risks with the high leverage that such derivatives offer.
Types of Traders
Position Trader — Trade positions held from months to years.
Swing Trader — Trade positions held from days to weeks.
Day Trader — Trade positions held throughout the day with no overnight positions.
Scalp Trader — Trade positions that are held for seconds to minutes with no overnight positions.
What is Investing?
Investing is the allocation of resources such as capital to generate profit. Investors use fundamental analysis and stay passive with investment and seek to accumulate gradual wealth over extended time through compounding or reinvesting profits into additional financial securities. Investors take advantage of the interests, dividends, and stock splits that come with an investment for an extended period. As such, investors generally do not worry about market fluctuations as the downtrends will be covered with mentioned advantages that come with long-term investment, making investors risk-averse.
Active — Active investing involves actively managing the investment portfolio
Passive — Passive management of investment portfolio, ie. Investing in index funds like Crypto ETFs for busy working professionals
Growth Vs Value — Investment in larger corporations of high growth potentials. Such larger corporations usually have higher valuation ratios than value companies, yielding higher dividends for investors.
Trading & Investing Summarized
- Investing takes a long-term approach to the markets
- Trading uses short-term strategies to maximize profits i.e daily, monthly, or quarterly
- Investors tend to ride out short-term losses
- Traders will attempt to make transactions to make quick profits to recover from losses resulting from market volatility
Fundamental analysis is used to measure an asset’s intrinsic value and studies economic and financial factors such as macroeconomic factors like economy and industry conditions to value a financial asset. The results from a fundamental analysis help an investor make sound investment decisions.
In cryptocurrency, a fundamental analysis includes a public blockchain data, or on-chain metrics like hash rate, holders, addresses, transactions amongst an abundance of other metrics. Analysts then use these metrics to measure the overall health of the network by creating complex technical indicators.
However, fundamental analysis may be less relevant for the crypto market in predicting price movements, although widely used in traditional financial markets as cryptocurrencies like Bitcoin are still very much driven by speculation. Crypto as a new market will mature in time to come and methods of cryptoasset valuation are expected to be developed in the near future.
In contrast to a fundamental analysis, technical analysis does not consider the intrinsic value of an asset. A technical analysis instead studies the historical trading activities of a financial asset to predict future market movements to evaluate a market’s strengths and weaknesses. A technical analysis includes the study of trade volumes and chart patterns amongst a plethora of charting tools.
Unlike fundamental analysis, where deemed unsuitable for the crypto market due to its speculative nature, technical analysis is widely used in cryptocurrency. To measure risk is to manage it, thus a technical analysis can be used as a risk management framework as it analyzes market structure to make trades measurable and defined.
A Glance at Fundamental & Technical Analysis
- A fundamental analysis evaluates assets by measuring its intrinsic value
- A technical analysis studies the movement history of an asset and does not consider its intrinsic value
- Both fundamental and technical analysis are methods used to research and forecast market trends
Depending on your financial goals and personality, you can be both a trader and an investor as both seek to profit from the financial markets. Beginners may want to try out trading before venturing into long term investment as investment afterall, requires seasoned fundamentals to be able to make sound decisions in gradual wealth accumulation. Also, a combination of fundamental and technical analysis can be employed as your trading strategy and may offer you higher chances of reliable investment opportunities. For related articles, read DigiFinex Academy.