Trading versus Investing

The text below is provided for informational purposes only. It is not investment advice; you must do your own due diligence before making any investments. By reading beyond this point, you agree to hold the owner of this website harmless for your investment decisions.

Both traders and investors are trying to make money in the stock market, but their methods differ.  The main difference is related to the investment time frame.  Traders tend to hold stocks for short periods, making smaller gains per transaction, but making more frequent transactions.  Investors tend to “buy and hold” stocks, making larger gains per transaction over a period of years.  Trading is more speculative than investing, which takes more of a value-based approach. The Bear is an investor, not a trader, so my remarks on trading are from reading, not direct experience.

The following link provides a good explanation of trading vs. investing:

Traders are looking to make profits by focusing on short-term changes in the price of a stock.  The actual valuation of the stock is not the major concern.  The trader is hoping that the price will go up, in which case they can sell and lock in a profit, or down, in which case they can profit by selling short.  The trader is more focused on technical factors or momentum that will have short-term effects on a stock’s price rather than on the long-term growth prospects of the company.

Investors are looking to make profits by focusing on the long-term growth prospects of the company.  The actual valuation of the stock is a major concern because it affects the potential profit.  In the words of Warren Buffet, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”  Growth potential of the company and dividend payments are of interest to the investor.

Trading falls into different categories depending on the time frame:

You probably have heard of “day trading”.  These traders buy and sell stocks within one trading day; they do not hold the stocks overnight to avoid the risk of price changes from one day’s market close to the next day’s open.

“Scalp trading” is a more extreme version of day trading, with positions held only for minutes or even seconds.

A “Swing Trader” holds positions for a period of days to weeks.  They are looking for short-term “swings” in the price of a stock.

A “Position Trader” holds positions from months to years.

Trading is usually driven by algorithms.  It may be hard for an individual investor to do well when professional traders have more sophisticated algorithms and more time available.  Note also that the more frequent transactions involved in trading will lead to higher costs and to short-term gains and losses, which may increase your taxes and reduce your net gain.

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