Investing and trading are two very different methods of attempting to profit in the financial markets. Both investors and traders seek profits through market participation. In general, investors seek larger returns over an extended period through buying,selling 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.
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/earnings ratios and management forecasts. Anyone who has a 401(k) or an IRA is investing, even if they are not tracking the performance of their holdings on a daily basis. Since the goal is to grow a retirement account over the course of decades, the day-to-day fluctuations of different mutual funds are less important than consistent growth over an extended period.
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 return of 10 percent to 15 percent, traders might seek a 10 percent 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. 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 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.
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.