Trading and investing in stocks are two different approaches to profiting from using the stock market. While some use the terms interchangeably, 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 make 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. The length of the trade could be as little as a few minutes, to as long as a few weeks. Typically, the active trader isn’t concerned with the long-term potential of a stock, because they’ll be out of the position soon.
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.
Additionally, due to the shorter time frame, active day trading is much riskier than investing. While investors wait out downtrends, unexpected declines can cause havoc on a day trader’s account.
Read More: How to Start Trading
Tips for Active Traders
If you are planning on active trading, there are a few key things to keep in mind.
- Type of Trading: Do you plan to scalp, day, or swing trade?
- Available Funds: Do you have $25,000 to meet the minimum equity requirement for day trading? If you don’t, you will likely need to focus on swing trading to build up your account.
- Strategy: Pick one strategy and stick with it to see the best outcome of success. There are plenty of strategies, ranging from news, chart patterns, and more.
- Risk Management: Risk is much higher with active trading. The general rule of thumb is to never risk more than 1% of your account on a single trade.
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. Investors are not looking for immediate returns, so they can afford to wait out the downtrends.
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. If you are managing your own retirement account, you might pick your own stocks to trade, or you might choose an index fund with a target retirement date.
Additionally, investment accounts typically require much less money to open than if you were to actively day trade. To get started, you would just need the minimum deposit requirement, which can vary from broker to broker.
Tips for Investors
- Have a Plan: Just because investing is passive, doesn’t mean you shouldn’t have a plan, especially if you are selecting your positions yourself.
- Patience: Patience is key. You’re in it for the long haul, after all. Downtrends will happen, but you are looking for long-term gains, not immediate profit.
- Diversify: Don’t put all your eggs in one basket. Stocks, ETFs, mutual funds, bonds, and other securities are part of a balanced portfolio.
Similarities Between Trading and Investing
Active trading and long-term investing both have the ultimate goal of making money on the stock market. However, while an investor might be looking for 10-15% gains in a year, a day trader might be looking for 10-15% gains in a single month.
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.
Disclaimer: Benzinga is a news organization and does not provide financial advice and does not issue stock recommendations or offers to buy stock or sell any security. Benzinga Pro is for informational purposes and should not be viewed as recommendations. Benzinga Pro will never tell you whether to buy or sell a stock. It will only inform your trading decisions.You can find our full disclaimer located here.