Trading and investing in stocks are two different approaches to profiting from using the stock market. However, they are two very different methods. Traders seek short-term profits, while investors look for long-term gains. Each method has its pros and cons, strategies, and nuances, but both have the ultimate goal of making money on the markets.
Basics of Stock Trading
Stock trading refers to people who have more frequent trades. Swing traders, day traders, and scalp traders all fall into this category because it requires a more active approach.
Stock traders are looking to make profits in a shorter time period, often using stop-loss orders to close out losing positions. In contrast, investors typically wait out downtrends in the market, assuming that it will pick back up and still make a profit.
Stock trading is also more time consuming because every day you want to trade, you will need to spend time creating watchlists, looking at newswires, using technical analysis indicators, and more to find stocks that are on the move and can help make you money.
A few examples of stock trading categories include:
- Scalp Traders – Hold onto positions for up to a few minutes, and not overnight.
- Day Traders – Hold onto positions during the day, but not overnight
- Swing Traders – Hold onto positions for a few days to multiple weeks. Not subject to the Pattern Day Trading Rule.
The time and money you have available to dedicate to active trading will factor into what style of trading you use. For example, accounts with less than $25,000 are limited to 3 day traders per week. If you do not have that money, you might go with swing trading, unless you stick to the pattern day trader rule and only day trade three times per week.
Read More: How to Start Trading
Basics of Investing
Investing refers to people who invest with a goal to gradually earn money over a long period of time. They will buy and hold onto stocks and other investable assets to earn a profit. Instead of trading stocks in a single day, or over a few weeks, investors hold onto stocks for months, years, and even decades.
Due to the longer period of time, investors typically hold onto their investments even during a downtrend, with the expectation that their investments will rebound and any losses will recover.
If you have a retirement account, such as a 401k or an IRA, you are long-term investing in the market.
Investing does not take as much time as active trading, because you don’t need to worry about the day-to-day happenings of your holdings. If you are managing your own account, you may take a few hours a week, or each month, to do research, adjust, and rebalance your holdings. Your research will likely be focused on macro and fundamental analysis.
If you have a retirement account through a firm (such as what your work offers for a 401k), or with a robo-advisor, you likely have very little to do to manage it.
Additionally, investment accounts typically require much less money to open than if you were to actively day trade.
Similarities Between Trading and Investing
Active trading and long-term investing both have the ultimate goal of making money on the stock market. The main difference between them is the starting capital, time commitment, and how long you buy and sell a stock.
Both trading and investing require patience and discipline, especially when it comes to your emotions. Emotionally entering or exiting trades can lead to big mistakes.
Additionally, each method requires some sort of trade trigger that will guide your decision to buy or sell a particular stock.
Active trading and long-term investing have the same goal, just different methods of getting there. One may be a better fit for you, or, you may find yourself using both to meet your goals.