When discussing the benefits that you can get from the money market, two types of market participants have different styles, that is traders and investors. An index is one financial instrument that you can use both for trading and investment.
However, despite having a similar way of working, there is a fundamental difference between trading and investing in the index market.
Check out the differences between Index Trading and Index Investment:
Period of opening a position
The first difference between investing and trading in an index is the period of opening a position made. A trader tends to buy and sell more often than an investor.
Several types of traders make transactions on the index market, that is intraday traders, swing traders, and long-term traders. Intraday traders tend to buy and sell within several hours on the same day. While swing traders tend to open and close positions within a period of several days to weeks.
For long-term trading and investors, the time used is not much different. However, it has slightly different goals. If a trader focuses on profit potential, then investors focus on security and asset growth in the long run.
Trading and Analysis Techniques Used
When a trader wants to make a profit by making several trades in the short term. Technical analysis and trading techniques based on the indicators on the chart likely help the traders.
While for investors who carry out transactions for a long time, Fundamental analysis will be easier and more accurate in providing a picture of the direction of the chosen market movement. This is because index investors tend to ignore daily price fluctuations. It only focuses on long-term trends that are controlled by economic performance and the prices of company stocks listed in the index.
Use of leverage
A trader tends to focus on the goal of making the maximum profit with minimal capital. In financial markets, brokers usually facilitate the use of leverage. Generally, leverage means giving you the ability to control money in a larger amount than the
capital you have. According to IFC Markets, the Forex leverage size usually exceeds the invested capital for several times.
The existence of such leverage facilities increases the profit potential while limiting losses suffered by traders. Thus, traders tend to use leverage in large numbers to multiply the results of their transactions in a short time.
Read more: 5 Easy Steps To Maximize Your Trading Profit Constantly