Though both Investing and trading are methods adapted to make a profit in the financial market, they are completely different from one another, so much that it’s safe to say that the only similarity between investors and traders is that they both seek profits via market participation.
Trading can be explained as the process of earning gains at shorter time frames by means of buying and selling stocks, commodities, currency pairs, or other instruments. In simpler words, generating profits by buying at a lower price and selling at a higher price within a relatively short period of time.
Traders, unlike investors, take advantage of both rising and falling markets to enter and exit positions; as a result, yielding comparatively smaller but more frequent profits, making most of the ever-fluctuating markets.
Unequivocally, this is a risk, but to make it a calculated one, traders often employ technical analysis tools, such as moving averages and stochastic oscillators, to find high-profitability trading setups. Moreover, they could also use a protective stop-loss order to close out losing positions at a predetermined price level automatically. Meaning, you could choose an amount beyond which you wouldn’t want your stocks to fall, so if the price reaches that level, it will automatically be sold!
Seeing that trading involves short-term strategies to maximize returns daily, monthly, or quarterly, meaning a traders style refers to the timeframe or holding period in which stocks or commodities are bought and sold, traders can generally be categorized into four types:
- Position Trader – Positions are held from months to years.
- Swing Trader – Held from days to weeks.
- Day Trader – Positions are held throughout the day with no overnight positions.
- Scalp Trader – Held for seconds to minutes (no overnight positions).
Traders usually choose their trading style based on factors such as account size, amount of time that could be dedicated, level of experience, and risk tolerance, for that is an unavoidable factor.
Investing, unlike trading, is a long-term approach wherein the investors reap larger returns over an extended period through the manner of buying and holding!
The goal of investing is to gradually build wealth over a period of time via a portfolio of stocks, baskets of stocks, mutual funds, bonds, and other investment instruments. These are mostly deemed as retirement accounts, hence being a seed that is bowed now only to reap the fruits years, even decades later.
And since the aim is long-term, the day-to-day fluctuations are ignored, and rather, the consistent growth over a period is more focused on. And considering that the market is ever oscillating, tools like price-to-earnings, ratios, management forecasts, and other market fundamentals are used to determine whether the downtrends will ride out, and the prices will rebound, or it’s better to exit.
Furthermore, Investors can enhance their profits through compounding or reinvesting any profits, interests, dividends, or stock splits that they earn as a perk of their investments into additional shares of stock.
Hence, we could conclude that these are two very different styles of profit generations made via the same base market!