In this article, we’ll compare two approaches to trading financial assets: trading and investing. Both can be applied in any market, whether it’s commodities, stocks, indices, or cryptocurrencies.

There’s a lot of misinformation circulating on the internet regarding investment, but especially concerning trading. So let’s delve into the exact definitions of each of these approaches, their advantages and disadvantages, issues of time horizon, and other important topics.

When we talk about trading and investments, we’re talking about putting a portion of our capital at risk with the expectation of obtaining a financial return, a profit for taking risks. In the market, there’s a dilemma of risk and return.

If I want low risk, I’ll have to settle for low returns, but if I intend to have a high return, like doubling my money in a few weeks, I necessarily have to take on more risk. Both trading and investing involve the risk of financial losses and also offer proportionally the potential for financial gains. But what’s the definition of trading?

Different Investment Timeframes

The term “trade” comes from the English “to exchange” or “to negotiate.” In the financial universe, trading is the act of buying and selling a financial asset with the aim of profiting from the price difference. So if I bought a stock at $10 and sold it at $15, I made a profit of $5 per share.

Day trading is when you buy and sell an asset on the same day. If you buy today and sell the next day or the following week, it’s no longer day trading; it falls into the categories of swing trading or position trading. All trading categories involve what’s called timing of buying and selling. For a pro trader, timing is crucial, something that may not be as relevant for an investor, as we’ll see here.

Trading is an approach that emphasizes price, based on the premise that price discounts everything, so all the information I need to know when to click the buy and sell button is already contained in the price. Then we have technical analysis traders who observe price behavior through charts, such as candlestick, bar, renko, heikin ashi, and there are tape reading traders, who look at the order book, times and trades; some even use charts in conjunction with tape reading.

Investment is Long-Term

But where does investment fit into this story? Because if I buy bitcoin today and only sell it in a year, exclusively observing the price, it was a trade. Funny, right? It was a long-term trade, but it was a trade; I only looked at the price and profited from price fluctuations, selling at a higher price than I bought. That’s a trade.

Alright, a trader can even make a long-term trade, but the investor will never invest today to withdraw profits the next day. That doesn’t exist. In other words, a trade can take two weeks, two months, but it can also be applied over a very short time horizon. Investment cannot be in as short a term as day trading.

Investment Considers Fundamentals

The investor doesn’t necessarily need to hold onto the asset they bought for 5 years; it can be a shorter investment horizon, like one year, for example. But there are no tools in the investment universe that allow this approach to be applied in as short a term as day trading.

The biggest difference between investment and trading is that the investor doesn’t start from the premise that everything is already embedded in the price, as the trader does. The investor seeks information beyond the chart. The investor takes into account the fundamentals.

But what are these fundamentals that someone observes to make investment decisions? We have macro fundamentals, such as how the economy is doing overall, how the sector you’re thinking of investing in is doing, and we have the fundamentals of the company itself that you want to invest in, its financial health, how the last balance sheet was, what the indebtedness is like. I’m using examples here with stocks, but it’s evident that all these concepts apply to someone who invests in real estate funds, invests in an ETF, etc.

Trade Includes More Risk

Trading tends to be riskier than investing, but the issue is more complex than that. Think about it. The trader limits financial losses by using what’s called a stop loss, so if the market goes against the trader, they’ll lose 1% and close the operation, exit the market. And the investor? Many times they watch the market plummet 20, 30, 70% in their heads. By the time new reports come out saying that the fundamentals have changed, the market may have already plummeted significantly.

But overall, the trader will expose themselves to much more risk than the investor for a number of reasons. The trader makes more moves in the market than the investor; in the case of a day trader, they can make 30 trades in a single day. That alone entails more risk. The trader usually uses very high leverage and trades assets like mini-index and mini-dollar, which indeed involve a higher degree of risk than simply opening the home broker and investing in a stock.

Trading and Investment Are Not Exclusive

So in this article, you won’t see any favoritism or demonization of trading or investments; we’ll understand the pros and cons, and when we reach the end, you’ll choose which one is more appropriate for you, for your profile, for your objectives, and there’s even the possibility of you combining the two.

There’s no law prohibiting a trader from having long-term investments, and no law prohibits the investor from making short-term trades to take advantage of some opportunity they identified in the market. So sometimes I put on my trader hat, sometimes I put on my investor hat. Notice that it’s not necessarily one versus the other.

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Which Fundamentals to Consider?

We skimmed over the fundamentals issue very quickly, so let me clarify some things here. In the investment universe, “fundamentals” refer to the financial and economic aspects

of a company, sector, or market that can influence the performance and value of financial assets. These fundamentals provide us with data about the financial health of a company and its ability to generate profits and growth over time.

Fundamentals can include a variety of factors, such as:

Financial statements: This involves the analysis of financial reports, such as the balance sheet, income statement, and cash flow statement of a company. These statements provide information about the financial health, profitability, debts, and cash flow of the company.

Financial indicators: These are metrics that help evaluate the financial performance and efficiency of a company. Common examples include net profit, profit margin, ROI.

Investors will also conduct an analysis of macroeconomic factors, such as interest rates, inflation, economic growth, and government policies, which can affect the prospects of a sector or market in general.

Value vs. Growth Investing

The evaluation of fundamentals helps investors make informed decisions about buying or selling financial assets. By analyzing fundamentals, investors seek to identify solid companies with long-term sustainable growth potential. It’s important to mention that there are some trends in the world of investments, so if you’ve identified that your profile is more of an investor than a trader, the next step is to decide whether you’ll apply Value Investing or Growth strategies.

Which brings us to an important question, that the investor can earn dividends, instead of focusing exclusively on capital gains from price fluctuations. The trader only cares about the capital gain they’ll have by buying at one price and selling at another. The investor may have these capital gains, but they often invest in a stock aiming to become a partner in that company and thus receive dividends, interest. The investor doesn’t need to sell the asset they bought to see the color of money, to see the profit.

How to Decide Between Trading and Investment

But enough talk, what’s better, trading or investment, which one brings in more money? Obviously, things aren’t that simple. If you tell me you want to make your money grow in 2 days, you’ll be forced, not by me, by logic, you’ll be forced to make a trade; there’s no investing with a two-day horizon, fundamentals don’t change that quickly.

Now, let’s say you want to build wealth, let’s say you don’t have time to keep an eye on the market on a daily basis because you already have a job that takes up all your time, so because you don’t have available time to dedicate to the market, because you don’t intend to withdraw profits next week, you come to the conclusion that your goal is more long-term, and that perhaps investment is more suitable for your profile and routine than trading.

Factors Impacting Decision-Making

It’s important to mention that in the world of investments, we have investment advisors, qualified individuals who dedicate themselves full-time to the market, and thus can help you make better investment decisions. In trading, it’s every man for himself; you’ll click the buy and sell button based on some chart pattern; often the trader will be using high leverage, meaning they’re moving a much larger financial amount than the capital they deposited with the brokerage, which entails more risks. To make an analogy, trading is rock and roll, investment is jazz.

And there are several categories, both for trading and investments. The trader can operate trend, reversal, sideways; the investor, as I mentioned before, can be a Value Investor, can be a Growth investor. They’ll decide whether they want to prioritize growing wealth in the long term or if they’re more interested in a monthly income that investments can provide for them.

Taxes for Trading and Investments

Another point to consider is taxes. In day trading, you’ll pay more taxes, and every month you close in profit, you have to spend a few minutes there to pay the DARF. Time is our greatest asset, so this also weighs in the decision of which path you’ll follow, Trading or investment, or a combination of both.

The long-term investor will spend much less time paying taxes, and in fact, will pay fewer taxes than the Day Trader. And then you say why do some people choose to day trade? More taxes, more risk, they have to dedicate more time, and we know that fewer than 90% of people who try day trading succeed, why do people want to day trade? Let’s go.

How Much Does Trading and Investment Yield

If you check the average profitability that an investor seeks when they set up the so-called diversified portfolio, we’re talking about keeping up with or slightly beating the CDI and the IBOV, we’re talking about the famous 1% per month, a little more. So if they invested 10,000 reais, they expect that when the month turns, they’ll have earned about 100 reais.

In Day Trading, you can make these 100 reais on top of 10,000 in a few minutes. So the person in Day Trading can literally achieve in minutes the return that the investor aims for in the entire month. And what’s the catch? You can blow up those 10,000 reais, hand it all over to the market, lose all your capital, just as easily, just as quickly. It’s the risk and return dilemma we talked about.

Risk Management is Key in Trading

In day trading, you can lose in one day if you don’t know what you’re doing, if you don’t have management, if you don’t use a stop loss, in other words, if you do everything wrong, everything in an amateur way, you can lose all your money at an absurd speed. And that’s why day trading is talked down on all over the internet; any Joe can deposit 100 reais with the brokerage, click the button, lose everything, enter the statistics as just another person who tried day trading and failed.

These numbers of people who “failed at day trading” will continue to grow because more and more people are entering the stock market, everything is very accessible, with 100 reais you can open an operation, sometimes the person is getting used to the home broker, then they click by mistake, enter the market, realize the mistake they made, and exit the operation immediately with a small loss, there you go, they enter the statistics as a person who tried day trading and failed. But did they really try? Or is the ease of access to the buy and sell buttons inflating the statistics of people who failed at day trading?

Define Your Risk Profile

So in day trading, is the risk high? Yes, it’s the Formula 1 of the financial market, you can lose everything and then some, but day trading, if done correctly, with a small portion of your capital, the other part can be invested, but a small portion of your capital is allocated to day trading, and with risk management, if done intelligently, day trading can greatly leverage the gains of your portfolio. Think of day trading as a portion of your investment portfolio; you have 5% in bitcoin, 5% in Apple, 5% in who knows what… and 5% in day trading.

Disclaimer! For some risk profiles, the allocation in day trading will correspond to 0%. I’m just giving hypothetical examples here; nothing is a recommendation, don’t make investment decisions and portfolio allocation based on what I’m saying, seek an investment advisor from BTG Pactual, link in the description.

Define Your Conditions Before Deciding

So, to tie everything we’ve talked about: the first thing a person does in the financial market is to determine their risk profile and their short, medium, and long-term goals. Then they’ll ask themselves how much time they want to dedicate to the financial market. With this information in hand, they’ll have clarity to decide whether they’ll invest, train, or make a combination of both.