Investing vs Trading

Investing and Trading are two different methods of attempting to profit in the financial markets. Both investors and traders seek profits through market participation. Investors generally seek 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 time frame, more frequent (smaller lower yield or larger higher yield) profits.

What Is Investing?

Investing takes a long-term approach to the markets and often applies to such purposes as retirement accounts. The goal of investing is to gradually build wealth over an extended period of time. This is done by buying and holding a portfolio of one or more asset classes. This can include stocks, baskets of stocks, mutual funds, bonds, exchange-traded funds (ETFs), and other investment instruments.

Investors generally follow a long-term investment time horizon to achieve their goals. This is usually more than one year as evidenced by the buy-and-hold strategy. The total length of time that an investor takes before they get their money back depends largely on their investment style or strategy and their goals. This means that someone saving for retirement has a longer time horizon than someone who is saving money to put a down payment on a house.

Investors typically seek and are content with annual returns which follow a similar pattern and performance of benchmark indexes for their long-term portfolio of investments.

Examples: 401K, IRA, Mutual Fund, Index Fund, Pension Plan, Annuity, Real Estate (buy and hold).

Investment Styles: Buying-and Selling vs Buy-and Hold

Investors generally tend to take one of two types of investment approaches. These styles are noted below:

Active Investing: Investors who take an active investing approach of buying-and-selling tend to monitor the markets on a regular basis and make changes accordingly. Active investors generally seek out investments which can mimic or outperform the returns of a specific benchmark index.

Passive Investing: Passive investors follow a buy-and-hold strategy. This type of investor does not make an effort to closely monitor the markets on a daily or even regular basis. The goal of passive investing is to track the returns of the benchmark index.

What Is Trading?

Trading involves more frequent transactions, such as the buying and selling of stocks, commodities, currency pairs, or other instruments. The goal is to generate returns that outperform buy-and-hold investing. Trading involves short-term strategies to maximize returns daily, monthly, or quarterly.

Unlike investors, traders have a short-term time horizon in mind while executing their trades. That's because traders monitor the markets consistently for changes in asset prices before making their moves. The goal is to take advantage of these ups and downs to maximize profits and minimize losses. A trader's time horizon can be anywhere from a few minutes to several days.

Traders typically seek returns daily, weekly, monthly, or even higher yields PER TRANSACTION on individual trades with larger capitalization requirements.

Examples: Derivatives, Currencies, Commodities, Futures, Options, Short-Term Real Estate (Flips, Notes, Rehabs)

The Bottom Line

People often confuse investing and trading, using the terms interchangeably. But it's easy to see why because there are some distinct similarities, such as the need to open accounts, deposit money, and buy and sell assets. But the two are very different. Investors have a much longer time horizon than traders and are usually more risk-averse. Traders usually have a better understanding of how different assets and markets work. Whether you're an investor or trader, you should be aware of the rewards as well as the risks involved.