Investing and trading are not the same thing even though many people make the mistake of thinking they are. Investing is built on the premise of buying securities (stocks), holding them for a period of time and selling them for a profit. Trading involves much more frequent buying and selling of stock and other securities with a goal of outperforming buy-and-hold investing.
Both are ways of building wealth, one over time, the other more quickly. One is not better than the other but it is generally accepted that trading can be more treacherous, especially for the novice.
Related: THE ROLE OF THE SEC
Investors like to buy securities that are valuable enough to be kept for years, perhaps even decades. The idea is that profits generated, as well as dividends earned will usually be reinvested.
Markets fluctuate but investors tend to ride those fluctuations out based on an expectation that eventually the stock will recover. Investors tend to care mostly about fundamentals like P/E ratios and management forecasts.
Traders are focused almost entirely on buying low and selling high. Traders also engage in a practice known as “selling short” which involves selling high first, then buying to cover that sale at a much lower price later. This is a way of making a profit when the market falls. Contrasted with investors who tend to “ride out” depressed markets, traders try to take advantage.
There are four categories of trader:
Position Trader – someone who holds positions for months or years
Swing Trader – someone who holds positions for days or weeks
Day Trader – someone who holds positions for a day or less
Scalp Trader – someone who holds positions for a few seconds to a few minutes
Micro To Macro
Another way of looking at the difference between traders and investors is whether the focus is on the short-term (micro) or the long-term (macro). Traders concern themselves with the short-term price fluctuations of stocks and typically decide in advance the % increase they want to see before they sell a position. (When shorting, they are typically looking for a certain decrease before they buy to cover that position.)
As you might imagine, the potential for immediate and substantial rewards exist in the trading world. With such rewards comes substantial risk. Just because you expect a stock to increase in value doesn’t mean it will. If your timeline is short, you may lose money versus the “wait and see” attitude often followed by investors. Of course, the reverse is also true. Investors may hold on to a position for too long and end up losing everything.
Fees And Capital Gains
Clearly less buying and selling costs less. Traders pay trading fees and commissions more frequently. On the other hand, if they are rewarded for their trades, overall, they can come out ahead.
Short-term capital gains (taxes on stocks held less than a year) are at the same rate as regular income. Long-term capital gains are taxed at a lower rate – to encourage people to invest in companies and create a less volatile climate.
Tools such as those found on WooTrader and FinanceBoards can help you whichever strategy you follow because they provide the research and information you need whether you are a trader or an investor.