Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Trading vs investing

In this article, we summarise the main differences between investing and trading, including how the duration of an investment or trade varies, which strategies complement each and when one might be used over the other.

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What is the difference between trading and investing?

Investing and trading are different approaches for trying to profit from the price movement of financial assets. Investing takes a longer-term approach, while trading focuses on shorter-term buying and selling – but the differences don’t end there.

Investing and trading have several differences, including strategy, duration, costs, taxes, activity level and more. Here is a breakdown of some of the key contrasts between trading and investing.

Use of leverage

The shorter-term nature of trading tends to increase the amount of leverage used. Day traders who may be spread betting or trading CFDs on stocks, forex, indices or any other financial instrument will often use leverage since they want to make short term gains. They tend to watch their positions and will typically have small stop-losses/risk per trade.

Swing traders may still utilise leverage but often less than a day trader, since their positions are longer-term and aren’t being watched constantly.

Investors may use leverage, but it is less common since investors are typically holding positions for the longer term and need to be able to hold through the natural ups and downs of the market on the path to longer-term profits. Not using leverage makes that easier. Holding through a losing period is harder with leverage, since the loss is magnified by the amount of leverage set at the beginning of the trade.

Read more about trading with leverage​.

Strategy

Investors and traders use various differing strategies to extract profit from the market. Some short-term strategies​ include the following:

  • Day trading and scalping strategies are utilised with the aim to capture profits in minutes or hours, sometimes even seconds.
  • Swing trading attempts to capture price momentum that could last between a few days and a few weeks.
  • News trading​ allows traders to capture the result of economic announcements, such as company earnings and unexpected breaking news.

Investors also have several strategies at their disposal, including:

  • Fundamental investing, which is focused on finding companies with solid or improving earnings or financial position. These investors use fundamental analysis, which is the study of the company’s historical and expected financial performance.
  • Value investing​, which involves finding companies that are trading at low price levels relative to their financial value. This perceived value for money can occur due to a negative sector outlook for a particular industry or as a result of the company getting bad publicity, but if the stock market crashes even good companies may fall, presenting a potential value-based buying opportunity.
  • Buy and hold investors are willing to hold through short-term ups and downs to realise the long-term potential and value as a company grows over time.
  • Passive investing is the buying of assets like exchange-traded funds (ETFs), metals (such as gold or silver), or blue-chip stocks, and then holding them until they need to be sold in retirement. Passive investing is concerned with keeping trading activity and time spent on research to a minimum.

Duration of trade

The duration of a trade is shorter than an investment. An investor will often buy and hold an asset for years, while a trader may buy and sell an asset within months, weeks, days or even seconds. A day trader may, for example, employ high-frequency trading strategies.

Traders may be looking to compound their returns more quickly than an investor. Compounding returns works the same way as compound interest. The shorter the duration of the trade, the more chance there is to compound since any profits are added to the account balance and can be used on the next trade. This doesn’t always work though, as a poor strategy will produce losses, resulting in a lower account balance, not a higher one. Investor's compound gains tend to be slower as they usually rely on the reinvestment of dividends (typically paid quarterly) to help grow their profit and loss.

Number of trades

A trader may place as many trades in a day as an investor does in a year. There is a wide range of how active traders and investors are, with varying investment timeframes.

Day traders place multiple trades each day, while swing traders may place multiple trades in a week or a month. Position traders​, on the other hand, may take a few trades every few months or more.

Whereas investors may place a couple of trades a year, some will be more active and others less. Some may go years without making a trade. Others may want to rebalance their portfolio yearly or continue to diversify their holdings, resulting in more trades.

Risk/reward profile

Traders and investors are both looking to make a profit on the risk they are taking, but how they measure risk and reward may differ.

A short-term trader may define an exact level to exit a losing trade and take profit on a winning trade. For example, they may be willing to lose 5% but will take profit if they make 15%. This example is a precise and favourable risk/reward ratio​.

An investor may not have specific exit points. Instead, they may be holding for the long-term, until they need the funds or until the reason for the investment no longer exists. That said, they may still have a risk/reward profile in their portfolio that is expected to generate an average percentage return over many years in exchange for some periods where the portfolio value might drop.

Long and short

Investors primarily buy assets that they expect to rise over the next year or more. This is known as long-only. Falling prices are typically used to accumulate long positions instead of trying to short and profit from the decline.

Traders may opt to go long and short, taking trades whether prices are rising or falling. Declining prices present a potentially profitable opportunity for traders who go short and are looking to benefit from the age old saying that “markets take the stairs up and the elevator down”, which refers to sharp and sudden downside moves that can often be witnessed in asset prices during times of panic. Read our full guide on how to short a stock​.

Reacting to volatility

Investors may not react to volatility since it is unknown how long the volatility will last, and investors tend to be less concerned with short-term ups and downs. If the volatility creates large drops or rallies in certain assets, investors may choose to use the opportunity to buy an asset or sell an existing one. Other investors may ignore volatility and remain focused on their long-term strategy and goals.

Traders may become more active in volatile markets since larger up or down movements create trading opportunities. Not all traders are the same, though. Some may prefer trading in calmer markets, while others may only like being very active in volatile markets with large price movements. The stock market can present particularly volatile situations in the short-term, so read more about the most volatile stocks​ to trade on right now.

Utilising ETFs

Buying exchange-traded funds (ETFs) can help to provide diversification because their holdings may include commodities, stocks, treasuries, currencies, or other assets. By owning an ETF, the investor will own a piece of what constitutes the fund.

Traders may also utilise ETFs, but typically only the ones with high volume and movement. The high volume allows traders to enter and exit with ease, while the movement provides a profit opportunity. Our exclusive share baskets​ can also be an efficient way for a trader to speculate on the price movements of a number of stocks using only single position.

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Costs

Buying and selling incur commissions in most trading accounts. Therefore, traders tend to have higher costs than investors, since they trade more often and are placing multiple transactions throughout the day. In contrast, investors that hold positions in mutual funds or ETFs will usually pay a yearly management fee to the fund, and they tend to also face commission charges to the broker.

When spread betting, this doesn’t come with commission fees. The trader pays a spread fee and overnight holding costs (excluding forward contracts) but can avoid management fees overall.

Click to see an overview of our trading costs​.

Tax

Profits in a spread betting account are not subject to capital gains tax, and these are also excluded from stamp duty*. Profits in other types of trading accounts are most often taxable, even when trading CFDs with us.

Open a spread betting account to get started.

When might I pick one over the other?

Whether a person both trades and invests, or chooses just one activity, depends on their goals and other personal factors such as time, funds, and personality.

If your primary goal is to grow a portfolio to eventually sell in retirement, then you could consider investing, as some benefits of this includes collecting regular dividend payments and compound interest over time.

If you want to make gains comparatively quickly and benefit from your market analysis in potentially a matter of days (if your analysis is correct that is), then trading may be a more viable option. However, this depends on each individual trader and you should conduct the necessary research and risk-management​ before making a decision. Many people will decide that they want to both invest and trade in the short-term utilising different time horizons.

FAQS

How can I start trading?

To start trading, open a demo account to get used to our trading platform and placing trades. Work on developing a strategy for when to buy and sell. Our risk-free demo account allows you to practise trading with £10,000 of virtual funds. Once comfortable, you can transition to a live account to start placing trades with real money.

Is Warren Buffett a trader or investor?

Warren Buffett is an investor, in particular, a value investor. He, as part of his company Berkshire Hathaway, has bought and hold positions lasting for several years or even decades.

Trading vs investing: which is more profitable?

Traders and investors can both be highly successful. It is the strategies employed by each individual trader/investor that determine profits, not the trading style itself. However, short-term trading can be particularly risky and poses a high threat of losses, so read our risk-management guide to see how this can be combatted.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.