A:

Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds and other investment instruments. Investors often enhance their profits through compounding, or reinvesting any profits and dividends into additional shares of stock. Investments are often held for a period of years, or even decades, taking advantage of perks like interest, dividends and stock splits along the way. While markets inevitably fluctuate, investors will "ride out" the downtrends with the expectation that prices will rebound and any losses will eventually be recovered. Investors are typically more concerned with market fundamentals, such as price/earnings ratios and management forecasts.

Trading, on the other hand, involves the more frequent buying and selling of stock, commodities, currency pairs or other instruments, with the goal of generating returns that outperform buy-and-hold investing. While investors may be content with a 10 to 15% annual return, traders might seek a 10% return each month. Trading profits are generated through buying at a lower price and selling at a higher price within a relatively short period of time. The reverse is also true: trading profits are made by selling at a higher price and buying to cover at a lower price (known as "selling short") to profit in falling markets. Where buy-and-hold investors wait out less profitable positions, traders must make profits (or take losses) within a specified period of time, and often use a protective stop loss order to automatically close out losing positions at a predetermined price level. Traders often employ technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups.

A trader's "style" refers to the timeframe or holding period in which stocks, commodities or other trading instruments are bought and sold. Traders generally fall into one of four categories:

  • Position Trader – positions are held from months to years
  • Swing Trader – positions are held from days to weeks
  • Day Trader – positions are held throughout the day only with no overnight positions
  • Scalp Trader – positions are held for seconds to minutes with no overnight positions

Traders often choose their trading style based on factors including: account size, amount of time that can be dedicated to trading, level of trading experience, personality and risk tolerance. Both investors and traders seek profits through market participation. In general, investors seek larger 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 timeframe, taking smaller, more frequent profits.

RELATED FAQS
  1. What are some ways to reduce downside risk when holding a long position?

    Learn about the various methods a trader can use to minimize risk of loss or protect a portion of profits in an existing ... Read Answer >>
  2. Is there a buy-and-hold strategy in forex, or is the only way to make money by trading?

    Typically there are different ways to trade in most markets. Traders have been classified into three groups, primarily based ... Read Answer >>
  3. What are common trading strategies used in a bull market?

    Discover four commonly used trading strategies by investors and analysts to make profits from a prolonged bull market, including ... Read Answer >>
  4. How can an investor profit from a fall in the price of bank stocks?

    Discover the main ways to take advantage of a fall in bank stocks. Shorting stocks and buying put options can let traders ... Read Answer >>
  5. Is volatility a good thing or a bad thing from the investor's point of view, and ...

    Learn the basics of volatility in the stock market and how the increased risk provides greater opportunities for profit for ... Read Answer >>
  6. Is it better practice to use a stop order or a limit order?

    Discover whether it is considered best practice to use stop losses or limit orders. Both options have their advantages and ... Read Answer >>
Related Articles
  1. Trading

    How To Start Trading: Trading Styles

    While investments can be held for years or decades, the four primary trading styles can be held from months to years, or only for minutes or seconds. These styles are: position trading, swing ...
  2. Financial Advisor

    A Day In The Life Of A Day Trader

    Day trading has many advantages and, while we often hear about these perks, it's important to realize that day trading is hard work.
  3. Trading

    How To Outperform The Market

    Active trading is an investing style that aims to beat the market. Find out how it works, and whether it will work for you.
  4. Investing

    The Roles Of Traders And Investors In The Marketplace

    Discover how these two groups work together to keep the market functioning properly.
  5. Trading

    What Type Of Trader Are You?

    There are different ways stock traders attempt to profit from market movements. Which of the strategies do you use?
  6. Markets

    Day Trading Strategies

    Day trading is the term often used for buying and selling stocks within the same day. Day traders seek to make a profit by leveraging large amounts of capital in order to take advantage of small ...
  7. Trading

    4 Common Active Trading Strategies

    Learn four of the most popular active trading strategies and why active trading isn't limited to professional traders anymore.
  8. Investing

    Introduction - Day Traders

    In this tutorial, we will examine the very short-term trading style known as day trading. In particular, we will show how the trader can create a winning combination by using particular strategies ...
  9. Investing

    The Market Participant Playbook

    Find out what effect institutional investors have on the stock market and individual traders.
  10. Trading

    What Type Of Forex Trader Are You?

    Timing may be the key to uncovering your true strength as a forex trader.
RELATED TERMS
  1. Investor

    Any person who commits capital with the expectation of financial ...
  2. Buy Weakness

    A proactive trading strategy in which a trader takes profits ...
  3. In And Out

    A trading strategy in which shares of a single security are bought ...
  4. Day Trader

    A investor who attempts to profit by making rapid trades intraday. ...
  5. Profit Target

    A predetermined point at which an investor will exit a trade ...
  6. Position Trader

    A type of stock trader who holds a position for the long term ...
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center