From an outside perspective, trading and investing may seem like interchangeable terms. But the reality is they are two completely different methodologies when it comes to being in the market.
Both methods are focused on the same goal, growing your wealth through exposure to the markets. However, their distinction is easily understood through the lens of time. Trading is focused on short-term gains, while investing is focused on securing long-term returns. While both traders and investors are seeking profitable returns, how you choose to behave in the markets should be guided by your unique goals and tolerance for risk.
At Exchange, we believe financial planning and asset management should be primarily focused on the long-term goals outlined in your financial plan. We often have conversations with clients about the benefits of investing in the market, rather than merely trading.
What is Trading?
Trading is when an investor analyzes the markets to time out when they should buy and sell stocks, providing them with a high rate of return within a short period of time. This simply means an investor is attempting to take advantage of the of the market, in the hope that they will make immediate returns.
While quick profits may seem appealing, trading is truly a guessing game. For example, rather than investing in the long-term success of a company, traders will buy shares of stock with the direct goal of selling them back at a higher price in the immediate future. These trades are based on guesses that the share price will increase allowing them to sell to generate a return. However, returns are never guaranteed. Short-term market fluctuations can greatly influence share prices, often leading traders to sell at a loss, rather than the gain they had hoped for.
What is Investing?
Investing, on the other hand, focuses on the long-term. Historically, the market has gone up. Look at the S&P 500. This index tracks the performance of 500 large companies and is one of the top benchmarks used to measure the performance of the stock market. Over the last 10 years, the S&P 500 has realized an average annual return of 13.79%.
This return is based on a long-term investing timeline. You may not always see massive returns over short periods of time, but investing can bring you long-term growth in the market, without feeling like you’re putting everything on the line.
Exchange is a goal-centric wealth firm focused on the long-term, therefore we choose to invest rather than “trade the market”. We focus on providing a fair rate of return for your assets that align with your financial plan. Those financial plans then direct investment management and tailor portfolios to individual client needs.
The Bottom Line
Investing and trading sound similar, but their building blocks are vastly different. Do you want to open yourself up to risk, or would you prefer seeing stable long-returns? Whichever path best aligns with your circumstances will help you pick which type of firm should manage your assets.
If you are curious how long-term investing can benefit you, consider scheduling a discovery meeting with us. We would love to sit down and discuss how investing can help you meet your long-term goals.