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There are two common approaches to making money on the stock exchange market; stock trading or stock investing. Although they are often used interchangeably, there is a fundamental difference between trading and investing. And it’s essential to understand both concepts to be able to maximize your investment.

This article provides an overview of both approaches to allow you to identify which is suitable for you.

Stock trading vs. investing

Understanding Stock Trading

Stock trading involves buying into securities and selling them after a short period. The goal of trading is to make a quick profit from the increased value of the stock, and not to hold it for long. Traders are more concerned about short term price movements and care less about long term performance.

Trading requires more participation in the market. It involves tracking and analyzing low priced stocks to know if there’s a possibility of a comeback.

There are different types of traders, including position traders, Day traders, Swing Traders, and Scalp traders.

Understanding Stock Investing

Investing is a long-term game. It involves building a portfolio of stocks, bonds, mutual funds, and other security and holding for years. Unlike the trader, the investor focuses on the long term viability of the investment. The goal of investing is to benefit from perks like dividends and interest rates over a period before selling. Warren Buffet is a perfect example of an investor.

Stock investing requires a lot of patience. The market is very volatile and risky, so there would be downturns and rebounds due to market fluctuations.

Other forms of investing include retirement investments like a 401(k) or an IRA and real estate investments like REITs.

The difference between stock trading and investing

Both the trader and the investor seek to profit by market participation. However, they differ in some ways.

• Period: trading involves holding stocks for a few days, weeks, or months. Investing, on the other hand, is a long-term approach that takes 5, 10 years or even a lifetime.

• Risk: Both approaches have elements of risk. However, trading involves more risks as the short term returns can be higher or lower.

• Capital Growth: traders make money from an increase in price, while investors build wealth from compounding interest and dividends over the years.

• Art vs. Skill: trading requires being skilled, technical, and having a good understanding of the market, while stock investing requires being able to analyze the best stocks to invest in.

• Commitment: obviously, trading requires more commitment, as you will have to monitor your investment to identify when best to sell. Investing, on the other hand, only requires identifying the right investment and periodic monitoring.

Which Should You Choose?

The answer to this specific question depends on you, your skills and understanding of the market, as well as your schedule. If you are a newbie with very little knowledge of the market or an employee or business person with little time in your hands, then you should invest, and vice versa.

Trading can become investing at some point. When the capital of traders becomes too big, they put some of it into investing.

Steps To Trade and Invest Wisely

• Have a trading or investing plan that dictates the conditions for you to buy or sell stocks, and stick to it.

• Determine the amount you can afford to lose and only invest as much.

• Be realistic with your analysis. Don’t run after stocks because of higher returns, as it always amounts to higher risks.

• Be prepared to wait. This is more applicable to investors. However, traders also need to be patient until it’s ideal to sell. 

If you are skilled and willing to research, analyze, and track your investments, then you should consider stock trading. Otherwise, it’s best to invest.

Links and Tools

Fundrise

Stashinvest

Robinhood

Dave Ramsey The Total Money Makeover