Investing vs. Trading: What's the Difference?

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 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 time frame, taking smaller, more frequent profits.

"While one could consider their trading activities as investing, for me, the difference between trading and investing has more to do with time," said Josh Brein, partner at Digital Growth Labs. "When you invest in something, you are looking to grow your money. Some people invest for a long time, such as for retirement, while others invest for a short time to hit a specific goal, such as buying a car. A person who owns an annuity, for instance, is investing for a longer time horizon than someone who enjoys trading stocks and moves their money around quite frequently. Trading, on the other hand, suggests the investor is taking a very short-term approach and is principally concerned with either making quick cash or the thrill of participating in the markets."

What Is Investing?

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.

Investments often are 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 eventually will be recovered. Investors typically are more concerned with market fundamentals, such as price-to-earnings ratios and management forecasts.

Anyone with a 401(k) or an IRA is investing, even if they are not tracking the performance of their holdings daily. Since the goal is to grow a retirement account over decades, the day-to-day fluctuations of different mutual funds are less important than consistent growth over an extended period.

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. While investors may be content with annual returns of 10% to 15%, traders might seek a 10% return each month. Trading profits are generated by buying at a lower price and selling at a higher price within a relatively short period of time. The reverse also is true: trading profits can be made by selling at a higher price and buying to cover at a lower price (known as "selling short") to profit in falling markets.

While buy-and-hold investors wait out less profitable positions, traders seek to make profits within a specified period of time and often use a protective stop-loss order to close out losing positions at a predetermined price level automatically. 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 account size, amount of time dedicated to trading, level of trading experience, personality, and risk tolerance.