Contact

What’s the difference between Investing and Trading?

Nick
October 14, 2020
by Nick Alexander,

People may ask if CFDs are a good investment. Investing and trading are two very different approaches when wanting to benefit from the financial markets. Investing takes place over a more extended period of time, where the investor wants a more considerable return as an outcome. When an individual trades they want to try and gain a profit from both rising and falling prices, this is called speculating. More often than not, traders will open positions on the financial markets using CFDs; this is with the premise of trading on margin to magnify profits. However, when trading using CFDs, there is also a risk that losses can also be magnified. 

Trading the financial markets 

Trading involves the buying and selling of FX, Indices, Commodities and Shares. Trading doesn’t need to occur over a long period of time as traders want to try and take advantage of fluctuating prices. Therefore, they will open a position when they feel a price may rise and fall and then exit that position when the price has hit a certain level. 

Going Long: When a trader is said to be going long, they want to buy the financial asset in the hopes that its value will increase, meaning that they can sell it if it does. Traders that go long are also known as bullish traders and will open a position based on the offer price (buy price). 

Going Short: When a trader goes short, they will sell the asset, essentially taking advantage of when the asset starts to plummet in value. Usually, the strategy involves selling in hopes that the assets price will fall, the trader may then repurchase the asset as it starts to rise again as a method of trying to obtain profit. Traders who go short are also known as bearish traders. 

Going long and short can be done when trading financial instruments via CFDs. Trading CFDs means that you won’t be owning the underlying asset but will still be exposed to the assets full value by placing a small initial deposit (margin). Find out more about CFD trading with our guide. 

Both investing and trading have one similar goal, and that is to obtain profits over a certain length of time. However, investors will buy the asset and hold on to it, whereas traders will speculate on rising and falling price of the underlying market price of the asset they want to trade. A long term outlook is taken when investing in the markets as the investor analysis the potential growth of the assets over the years. 

What markets can I start to trade? 

With Eightcap you have access to over 200 financial instruments covering FX, Indices, Commodities and Shares. We’ve outlined the different assets you can start trading on below. 

Forex

Forex trading is the exchange of currency into another. The currency market is the world’s most traded financial market; its main participants are companies, banks and individual traders. According to the BIS Triennial Central Bank Survey, the trading volume in the FX market reached $6.6 trillion per day, recorded last in April 2019. 

Many traders prefer the FX market due to frequent price fluctuations, making it volatile. This volatility is attractive, and there is a chance of increased profits. However, when trading CFDs while there is a chance of profits, there is also a chance of magnified losses due to trading on margin. To find out more about CFDs and how to minimise CFD trading risk read our guide. 

Discover over 40+ FX pairs, including major and minor pairs with us. 

Indices

An index measures the price performance of a group of stocks. There are two types of indices, one that covers the broad market performance within the country, such as the FTSE 100, which is 100 of the largest UK stocks featured on the London Stock Exchange. There are also specific indexes tracking a particular sector such as the NASDAQ which tracks the largest US tech companies.

Commodities

Trading commodities involves the buying and selling of raw materials on a number of exchanges. This is normally traded as a futures contract. Commodities include natural resources such as precious metals and oil. Find out how you can start opening positions on Crude Oil, Gold and Silver with Eightcap. 

Shares

Have the opportunity to go long or short on Australia’s largest stocks here. Share CFDs allow traders to speculate on a company’s price movements, without having to own the underlying share. Company owners may choose to offer shares to potential investors in the hopes of injecting some capital into the business so that the company can grow and expand. Investors will also have a return in capital if the company is in profit. Shares can also be offered to the public as well as private investors, if a company decides to do this, then it is known as an Initial Public Offering (IPO). A company’s shares will then be publicly and listed on a stock exchange. 

Trading on margin is high risk. Losses can exceed deposits.

All times are AEST.