The difference between trading and investing

Kenya is ranked among most attractive financial markets in Africa, offering myriad opportunities for investors looking for good returns on investment.

The robust investment climate is supported by strict industry regulators like the Central Bank of Kenya (CBK) and the Capital Markets Authority (CMA) who oversee the banking and capital markets sectors to ensure transparency while protecting investors.

Even as the market offers opportunities for both traders and stock investors, it is important to keep in mind the key difference between trading and investment.

Based on your risk appetite and investment goals, if you are a retail investor who is keen on financial markets, such as stocks markets, commodities, or forex markets, it is important to understand the difference between trading and investing before opening an account.

Trading is the act of participating in the financial markets to buy or sell financial securities for short-term gains. Traders rely on technical analysis, market sentiment, and macroeconomic factors to book quick profits mainly driven by price volatility.

On the other hand, investing is the act of buying securities or other tradable assets with the intent of earning long-term returns. Unlike trading, investors seek to benefit from long-term growth in share prices.

Stock investors will often look to purchase equities whose market value is lower than their book or intrinsic value in hope that the market will move towards the book value or higher.

Based on investing strategies and holding periods, traders are classified into different categories. Scalping traders have the shortest hold period, with no overnight positions. Their holding period can be anywhere between a couple of minutes to hours. Day traders or intra-day traders hold positions for a day, with no overnight holdings. Swing traders hold securities for anywhere between a couple of days and weeks, while position traders have the most extended holding period among traders, lasting from a couple of months to years.

Investors focus on fundamental analysis, growth potential, industry sentiment, and other macroeconomic factors to analyse the stock. Their main source of news about a stock is its earnings reports issued quarterly and explained in investor briefings.

They often perform detailed analysis of the data in the earnings report to gauge the financial health of the company and then rate it against other stocks. They also seek financial advice from the market intermediaries through which they invest. Most investors take positions on stocks, especially when prices are lower with the expectation of reaping capital gains when prices rise in the medium to long term.

If an investor has created a goal-based portfolio, the holding periods may vary.

Investing and trading involves different types of analysis techniques. Trading focuses on technical analysis to identify the price projections for a stock in the near future. Technical analysis considers past price movement and its features such as price trends, volume indicators, momentum indicators, chart patterns, moving averages and support and resistance levels. There is little consideration for the financial standings or business fundamentals of a firm while trading.

On the contrary, investing involves a fundamental analysis of a stock and the underlying business fundamentals.

Some of the primary factors that investors look for while evaluating a company are business model, competitive advantage, management, leadership, balance sheet, income statement, cash flow, intrinsic value of a stock, corporate strategy, macroeconomic factors and the impact on the firm or broader industry.

As a retail investor, how you invest or trade is based on risk appetite and investment goals. Trading is accompanied by a higher degree of risk taking into account external factors when predicting price movements. They also have to make quick short-term trading decisions.

Investing involves risk but much lower than trading.

Holding stocks for longer helps investors enjoy the benefit of compounding growth which results in much better returns.