Investing and trading are two sides of the same coin. That’s because both the approaches help in building wealth. The only difference between difference between trading and investing is that while investing money is done for a longer period of time, trading is more dynamic and is conducted over a day or two, or maybe a week tops. The same principles are applied while investing money in commodities too. So, let’s look at different scenarios that can help us understand the difference between investing and trading in detail.
✓ Investors and traders generally prefer to deal in different commodity instruments. While investors, who have a medium- to long-term perspective, like to put their money in commodity stocks and exchange-traded funds (ETFs), traders usually prefer commodity futures. It is not to say that traders don’t dabble in forward trading in commodities stocks or ETFs, but they usually swear by commodity futures. A commodity futures contract is an agreement to buy and sell commodities at a specified price on a specific future date. Crude oil and agricultural commodities futures are short-term contracts that locks in the price of commodity a few weeks or months in advance. Traders take various factors into consideration to keep actively buying and selling on a regular basis. The investor, meanwhile, likes to bide his time, maybe even take over a year, before he plans to cash in on an opportunity.
✓ An investor plays the waiting game in order to evade the daily market volatility. A trader, meanwhile, uses several financial tools to figure out which instrument can make him money over a short period of time. To understand the difference between day trading and investing, we borrow a cricket analogy -- an investor is like Rahul Dravid while a trader is like a Virender Sehwag. Both can fetch you runs but in vastly different fashion. The reason the investor has a long-term perspective is because past data show that commodities like gold have usually fared well in the long run. Let’s take gold’s case as an example. In 2007, the metal was valued at Rs 10,800 per 10 gram. Today, it’s priced at Rs 31,800. This is the reason why investors usually have to be patient. A trader though usually uses experience, nous and technical know-how to make money over a shorter period. The objective here is to predict market volatility to make money. In short, investing is relatively less risky than trading. The commodity trading market, therefore, works for those who have a high risk appetite.
✓ An investor looks at the fundamentals of commodities. That means they consider various economic factors that would impact supply and demand of the commodity. But, traders do a technical analysis to predict the direction of the market. Since traders make predictions based on price movements of commodities, the focus is more on the commodity’s market price rather than the factors that affect the price.
To sum up, both the practices require different ethos. While both may have the same destination, the paths chosen are different. It also depends on your risk appetite and time horizon. If you are new to trading in commodity-producing stocks, you could read more on reserves, rates of production, value of enterprises and net present value. Better still, you could seek the advice of a financial expert or professional to guide you through investing in commodities successfully.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.