While at times used interchangeably, there are some significant differences between trading and investing. Trading is often done on a shorter term basis by someone that is using chart analysis and momentum to take advantage of what they believe to be conditions in their favor. Trading involves frequent buying and selling of positions, often within the same day. Investing, on the other hand, is used by someone with a longer term time horizon that believes in the fundamentals of a company and positions themselves accordingly. This is typically considered more of a “buy and hold” strategy where a consumer will not be watching the intraday stock fluctuations and instead believes in the future prospects of the company and thinks the stock will appreciate over time.
Trading can also be broken out into different styles based on the time frame for holding a position. See below for generally accepted terms:
Scalp Trader-positions are held for seconds or minutes with no overnight positions or exposure. This means the trader goes home each day with no positions or is considered “flat”.
Day Trader-positions are held for minutes or hours throughout the day and liquidated before the close with the trader being flat
Swing Trader-positions are typically held for anywhere from a couple of days to a few weeks.
Regardless of which style of trading, each is typically basing trades on technical analysis tools including moving averages, relative strength, support/resistance levels or any number of other trading signals to give them signals for entry points. Traders view volatility as their friend…the more volatility, the more opportunity to take advantage of market fluctuations. Day trading requires a much larger time commitment than investing as a trader must be watching more closely or set trade triggers based on their analysis. The mindset is very different from an investor as stocks can be volatile and traders have to be prepared to act on a moment’s notice.
Investing is centered around building wealth over the long-term. Investors often thinks in terms of years and look to hold positions for extended periods based on a stock’s fundamentals. An investor can benefit from reinvesting dividends, stock splits and stock price appreciation without concerning themselves as much with volatility along the way. It’s still important for an investor to keep an eye on their holdings to ensure that none of the fundamentals or story has changed.
While both a trader and investor are both seeking capital appreciation, they are achieved in very different fashions with varying results. A trader may be looking for returns of 10-20% per month while an investor would be ecstatic with that return over a year time frame. Both trading and investing require the person to do their homework and understand the risks associated with the positions they put on.