Trading Versus Investing

Quite often, when we hear people discussing the stock market, the terms investing and trading are commonly used to describe the method by which we are attempting to profit from the financial market or markets. To many, these words are often used interchangeably as a means to describe seeking profits through market participation. However, in truth, they describe methods that are quite different from one another – despite the fact that both investors and traders could be buying and selling the same exact stocks or assets.

in the simplest of terms, investors are those that are seeking larger, long term returns, over an extended period of time. Their strategy is usually more so dictated by holding onto said stocks or assets, allowing it to increase as time goes on, and selling it as a much higher return later on in the future. However, traders are more so those who take advantage of volatility within the market, and look for rising and falling prices – entering and exiting their positions over a much shorter timeframe, so that while their profits are generally smaller, they are able to take advantage of volume by making far more frequent entries and exits.

What to Know About Investing?
When it comes to investing, investors are far more geared towards accruing their wealth over a long, extended period of time, by buying and holding their positions within the stock market or whatever other vehicles they might have in their portfolio. Often, these investors are holding some of these positions for years at a time, slowing adding to their position size every so often. This also allows them to take advantage of certain aspects like quarterly dividends, accrued interest, and changes that might occur within companies over the years.

Undoubtedly there will be fluctuations in the market, with up and down trends, but generally a savvy investor will pick the right investments, knowing when they can and should simply ride out the down periods, expecting that a rebound will soon be coming. Traditionally the stock market is essentially rising year over year, and they take long enough positions that they hope to recover their losses. An investor is usually a lot more careful than a trader, and is somewhat more conservative, as they are more concerned by fundamental market investment principles, than just what seems to be trendy at the moment. Someone like Warren Buffet comes to mind when you think of such principles.

Many of us are investors and may not even know it. Anyone with an IRA or 401(k), through their company is technically an investor, whether they are checking their prospectus or not. These retirement accounts are meant to grow over the course of decades and throughout your working career. These types of accounts are more so about long term, consistent growth than day to day booms and busts.

What to Know About Trading?
Traders, and trading in general is more so concerned with a series of frequent transactions, buying and selling of stock and different types of assets or commodities, over and over to accrue larger gains. Generally, traders are looking to secure higher gains than the average investor. While an investor might look to grow their portfolio as a supplement, by 10% for the whole year, a trader might be trying to earn 10% every single month. While both are usually keeping by the old adage “buy low, sell high”, a trader is also looking to “sell short”, by betting against a certain stock, assuming it may go down and buying to cover at a lower price. Regardless of either method, the trader is still looking to hold positions for an extremely short time, as short as possible – with some positions being held for under a minute if they can make it happen fast enough.

Considering the volatility that is involved in trading, traders often use a protective stop-loss order that allows them to automatically close out a losing position at a number of their choosing, this allows them to mitigate their risk and prevent taking losses that are too large, waiting and hoping for them to rebound when they could simply just put that into other places and make more trades. To be a successful trader, you will often require the use of software and technical analysis tools, to help in reading charts, and understand a number of principles of when you should enter and when you should exit a trade. There are also a few different types of traders, depending on the timeframe they hold a position, position size, and often just the way the market has been behaving for that period of time, traders tend to change their strategies to one of the following:

• Position Trader: Holds positions for months at a time, even over a year if they must.
• Swing Trader: This is quite popular in today’s world, as they hold positions for days or weeks hopping on trends. Sometimes even called a trend trader.
• Day Trader: The most common term of trader, holds positions through the day, with many only last minutes to hours without any overnight positions.
• Scalp Trader: Scalping is simply a method of holding positions for only seconds or a few minutes, often taking advantage of market volatility to earn a few cents on each trade.