Trading and investing in the stock market are often used interchangeably, but they are far from the same. Trading focuses on the short-term while investing is a strategy to build long-term wealth.
It is overwhelming to understand the stock market, the economy, and everything that makes the system run when you’re starting with investing.
Every time I have a conversation about the stock market, it seems to be under the assumption that it is a gamble, that only some elite group of people can participate in. It scares people away from the stock market when they think of it as gambling.
I like to keep up with the stock market and the world of finance, but I don’t consider myself to be a gambler. I do not have the risk appetite of someone who plays poker at the casino.
Most of my stock market portfolio is invested in good-quality companies with solid business models and great long-term potential. I do have a small portion of the money that is set aside for trading. This means that I might get in and out of a stock position quickly, within hours or days. I refer to it as my “fun portfolio.”
The stock market can be a great way to make money to secure your finances long-term – when you focus on investing.
If you’re only looking at the short-term, then you’re probably trading.
Knowing the difference between investing and trading can help you become a more confident investor while participating in market returns to grow your wealth.
So what is the difference between trading and investing?
Trading vs. Investing: What is the difference?
Timing: Holding Period
Investors buy stocks to hold long term. Whether 5, 10, 15 years, whatever the time horizon one might have for growing wealth. Investors aren’t usually looking to time the market.
On the other hand, traders typically look to time the time – buy low, sell high. A trader would be looking to get in and out of stock holdings within minutes, hours, or a few days.
Goal
Investors typically aim to invest and build wealth over the long term by purchasing small pieces of good businesses. Their mentality is to buy and hold “forever” or at least a very long time.
Traders are looking to get in and out of trades as quickly and profitably as possible. They’re always looking for opportunities where they think the market has not fully priced in a stock.
Time required
If you’re investing long-term, you don’t need to invest a large part of your time in this activity. It should be an automatic part of your financial life.
As a long-term investor, you invest periodically in fundamentally strong companies or invest in a few good ETFs to diversify your portfolio. You should not be worrying about the daily ups and downs of a stock or ETF.
As an investor, the mindset is that you are investing in the business. You won’t be looking at daily fluctuations of your net worth but rather focus on the overall trend of your positions over weeks, months, or years.
A trader, however, looks at their holdings daily or even several times a day. They are trying to profit off the price movement of stocks and get in and out of trades within minutes, hours, or a few days, often with a difference of a few pennies.
Belief
Investors hold stocks for the long term. They believe that the businesses they have invested in will be around for a long time and will continue to generate profits in the future, which will help increase their stock prices and dividends.
A trader would be looking to get in and out of trades very quickly to turn a profit. They are not so concerned with whether a company may be around over the next few years because they do not anticipate holding the stocks for that long.
Type of knowledge – technical vs. fundamental
Typically, an investor will ask whether the company they are investing in is in a position to do well in the future. What are their long-term prospects? Is the business in good shape? They might look at company statements and quarterly filings to determine how profitable the business is and might continue to be.
On the other hand, traders typically focus on technical indicators, reading stock charts, and market psychology. Based on market psychology and trends, their goal is to determine whether a stock will move higher or lower in the short or medium term.
Making money
An investor is looking to grow wealth as these businesses perform better. Investors anticipate that companies will increase their profits, reinvest their earnings into future growth, and pay dividends. As an investor, you might consider purchasing stocks with dividend income as a way to increase your wealth.
A trader is typically risking capital for a return in the short term. They are focused on making money from buying low and selling high and returning from these short-term price movements. A trader would not consider dividend income as part of their strategy, as they don’t intend to hold stocks long enough to realize dividend payments.
What’s right for me?
Now that you know the difference, it is time to incorporate this knowledge into your financial strategy.
If your goal is to create long-term wealth, then investing is the strategy you need.
My Philosophy: Trading is not for everyone; Investing should be for everyone.
On a personal note, I engage in both investing and trading.
Trading is a semi-hobby for me. But I keep a separate account, with a small sum of money set aside to engage in riskier trades, where the focus is on getting into stocks at the right price, focusing on the technical analysis, and not pay too much attention to the future value of the company (as compared to investing).
However, the majority of my portfolio is in stable companies, index funds, and ETFs, with a focus on slowly growing that portfolio.
You should make this assessment based on your financial situation, level of knowledge, interest, and risk appetite. Trading can be a fun hobby or an additional source of income.
But for most people, the focus should be on investing, and to create a plan to grow your wealth long-term and create a sustainable plan to grow your wealth through investing!