Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds , bonds and other investment instruments. Investors often enhance their profits through compounding , or reinvesting any profits and dividends into additional shares of stock.
Investments are often held for a period of years, or even decades, taking advantage of perks like interest, dividends and stock splits along the way. While markets inevitably fluctuate, investors will "ride out" the downtrends with the expectation that prices will rebound and any losses will eventually be recovered. Trading, on the other hand, involves the more frequent buying and selling of stock, commodities, currency pairs or other instruments, with the goal of generating returns that outperform buy-and-hold investing.
Trading profits are generated through buying at a lower price and selling at a higher price within a relatively short period of time. The reverse is also true: Where buy-and-hold investors wait out less profitable positions, traders must make profits or take losses within a specified period of time, and often use a protective stop loss order to automatically close out losing positions at a predetermined price level.
Traders often employ technical analysis tools, such as moving averages and stochastic oscillators , to find high-probability trading setups. A trader's "style" refers to the timeframe or holding period in which stocks, commodities or other trading instruments are bought and sold. Traders generally fall into one of four categories:.
Traders often choose their trading style based on factors including: Both investors and traders seek profits through market participation. In general, investors seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter timeframe, taking smaller, more frequent profits.
Both terms could actually be defined very broadly, and I am sure financial professionals could come up with many differences between the two.
Here are the basics in my view. Trading is the actual transaction that occurs when you buy or sell investments. If you are a trader, then you are the person creating transactions. You are buying or selling the investments for yourself or others. Ideally you want to have a plan first before any implementations, but in reality, many investors have itchy fingers and are ready to trade as the result of obtaining financial tips from the grapevine.
Naturally we all want to get rich faster, and watching or hearing our family, friends, and neighbors doing well financially motivates us even more to catch up. On the other hand, you may only have one brokerage account, and you may get a double-whammy at the worst time—access your money when the market is down.
This is a question that will no doubt receive a number of differing responses! I consider investing to be a process with a relatively known outcome. One example is purchasing an investment grade bond. Barring default, one can expect to receive interest over the life of the bond and principal at maturity. Trading, on the other hand, has outcomes that are more difficult to predict.
When one purchases a stock or an equity mutual fund, there is really no way of knowing in advance whether it will go up, down or sideways. For these reasons, one must have specific risk management rules when trading such as position-sizing, stop losses, etc to limit the risk to acceptable levels. Van Tharp has written a very good book on this complex question titled: While one could consider their trading activities as investing, for me, the difference between trading and investing has more to do with time.
When you invest in something, you're looking to grow your money. Some people invest for a long time and some people invest for a short time. A person who owns an annuity, for instance, is investing for a longer time horizon than someone who enjoys trading stocks and moves around their money quite frequently. When I hear the term "trading", what it means to me is someone who is actively moving money around in a brokerage account or some other type of investment account. Sometimes trading is done for you by a stock broker and sometimes it's done by the actual account owner.
When I hear the term investing, and this may not ring true to everyone, I think of someone who is taking a long-term strategy and more time with their investments. Those who are investing sometimes do trade their investment positions, but again, this is with more of a long-term view on their investing whereas a day trader is taking a very short-term approach to investing.
Most Helpful Most Recent. Investopedia New York, NY. Traders generally fall into one of four categories: Position Trader — positions are held from months to years Swing Trader — positions are held from days to weeks Day Trader — positions are held throughout the day only with no overnight positions Scalp Trader — positions are held for seconds to minutes with no overnight positions Traders often choose their trading style based on factors including: Schedule Consultation Was this answer helpful?
Moerdyk, Wyatt Boerne, TX. Hope that defines it for you. Swanger, Rose Knoxville, TN. Kluskowski, Paul Farmington, MN. Brein, Josh Bellevue, WA. Investopedia does not provide tax, investment, or financial services. The information is not meant to be, and should not be construed as advice or used for investment purposes.
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