Differences Between Trading and Investing

“Trades” typically last minutes, days, weeks, or months, depending on the trading style (discussed later) being used. “Investments” are often held for years.  Traders get in and out of trades as the price fluctuates. Investors are holding for the long-term gain in price, and aren’t as concerned about the minor day-to-day and week-to-week price fluctuations.

Returns are as diverse as the traders trying to get them. It is impossible to predict future profits. That said, there are some things to understand about how investing and trading generate returns.

If a trader is profitable, they can compound gains with nearly every trade. They are also capturing regular fluctuations in the asset’s price. In theory, this means traders can make higher returns than investors.

If a trader puts $10,000 into a trade and makes 10% in a week ($1000), on the next trade they have $11,000, and if they make 10% again, they make $1,100 in profit and have $12,100 for the next trade.  Investors do the same thing, but since trades often last years, the compounding occurs slower.

There is no benchmark for how much traders can make, but a good trader can make substantially more in percentage returns than an investor. Over the last 100 years, investing in an exchange-traded fund (ETF) that tracks the S&P 500 has earned investors an average return of 10.3% per year.

 “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.” – Warren Buffett

But stocks aren’t the only asset. An investor holding Bitcoin from the start of 2013 to the end of 2022 had an average return of 204% per year, despite the massive ups and downs the price took along the way.

In theory, a good trader can make higher returns, but there are times when simply holding (investing) when an asset makes a huge price run is the smart choice

Traders fall into a few broad categories, mainly focused on how long trades are held for.

• Position Traders: This style of trading is longer-term than the other trading styles. Trades may last months. Position traders often attempt to ride trends while they last, often using a daily chart to do it.
• Swing Traders: This style of trader places trades that last days to months. Swing traders are often trying to capitalize on a trend or price momentum. They may use 15-minute, hourly, 4-hour, or daily charts…or all of the above.
• Day Traders: Day traders don’t hold positions overnight. When their trading session ends, they need to be out of their trades. This puts a time limit on the trade of several hours maximum, usually. Most day traders spend minutes to a few hours in a trade. They are capturing the price moves that occur within a single day. They may use 1- to 15-minute charts.
• Scalpers: Scalpers jump in and out of the trades, and those trades last only minutes or seconds. They typically use ticks charts, 15-second, 30-second, or 1-minute charts, and they trade the trends and reversals that unfold every few minutes.

One style of trading isn’t inherently better than another. They are just different. Some people prefer fast action while others prefer less action/trades. Investors fall into a few different categories:

• Passive Investors participate in the simplest form of investing. An asset is purchased and held for many years or until it needs to be sold in retirement. Since the stock market indices tend to rise over time, stock market index ETFs are commonly used for passive investing, as is real estate.
• Value Investors focus on buying assets at a cheap price relative to prior prices or what they believe the asset is worth.
• Growth Investors focus on buying assets that are growing. Buying a stock when the company is increasing its earnings and revenue every year is an example of growth investing. Growth investors believe that if they buy assets that are growing, the price will also rise over time.

There are certainly other categories, but these are the most common ones.  All traders and investors can also choose their market. They may use the stock or forex market, or trade other assets.

As a general guideline, investing will take up less time than trading. Investors are holding trades for years, while traders need to constantly find new trades, whether it is every day or every couple of months. Finding quality trades takes work and time.

Scalping and day trading requires the most time because screen time is required every day to find trades and potentially make money. Swing traders and position traders need to spend time each week, or at least probably every month, finding suitable trades to take.

Growth and value investors may need to analyze the market periodically for new investments. However, since trades may be held for years, there isn’t much rush.

Passive investors spend the least amount of time researching or putting in screen time. They invest in their selected assets, possibly add to those investments at regular intervals (which can be automated), and just let them sit. How much time you have can help you decide what type of trader and/or investor you want to be.

Here are some of the ways that trading and investing are similar:

• Compound returns
• Require a skill set
• Require the ability to stick with the plan
• Can beat inflation

In the Returns section I talked about compounding. Both trading and investing offer the ability to compound returns. Compounding is when you make profit from your prior gains.

To trade or invest, you need a strategy – something that defines what to buy and when. Even passive investors need to know what to buy. The more someone trades, the more skill they need. Increased screen time means more opportunities to mess up as well as profit.

The ability to stick with a plan takes mental fortitude. People tend to lose money when they deviate from the plan they laid out for themselves.

For example, maybe they said they would hold a stock trade for several years because that’s how long they thought it would take for the positive things the company is doing to be reflected in the stock’s price… But instead, a week after buying it, they sell it at a loss because they lost sight of the long-term plan and got nervous.

Both trading and investing have the ability to beat inflation. Inflation rates vary by country and over time, but the average inflation rate has been a little over 2% per year since the 1990s. Investing or trading returns can well exceed that.

How much money do I need to start investing?

You can start investing with almost any amount. Many brokers let you start with a $10 deposit. Assuming no commissions, you can start by investing a few dollars. If you pay commissions, save up till you have an amount where the commission is a small percentage of the amount you are investing.

How much money do I need to start trading?

Start with an amount you can afford. There’s a learning curve to trading, so practice in a demo account until you have proven to yourself that you are profitable over several months of trading. Then, start with a small account. If you continue to be profitable, you can always add more funds to the account.

Which is better, trading or investing?

Both have the opportunity to be successful, and you can do both at the same time. Investing is taking longer-term trades and trading is taking shorter-term trades. You can put some money toward investing and some money toward trading.

Is trading or investing more profitable?

It depends on the skill of the person doing it. That said, generally, trading has higher theoretical returns because gains can be compounded more quickly. A highly skilled investor can make higher returns than an unskilled trader, though, and trading takes up more time than investing. Remember that your time is also valuable.

What’s the difference between trading and selling?

Selling is part of the trading process. It is how gains or profits are locked in. If you buy an asset at $100, the price will fluctuate. If you sell it at $120, that is how the profit is locked in. Now that capital and the profits can be used to make another trade.

Final Word

Trading and investing have some similarities, mainly that they can be used to generate profits and beat inflation. Both also require that you have some knowledge about what you are doing.

Trading and investing are different in terms of how much time you need to put into them. The shorter the time frame, and the more trades are taken, generally the more time you’ll need to put into your trading or investing.

Trading offers higher return potential, but ultimately, it comes down to the skill of the investor or trader. You don’t need to choose whether you want to be a trader or an investor.

You can do both by allocating some capital to trading and some to investing. Continue to expand your knowledge by learning about short squeezes. It’s an event that can cause rapid and sharp price moves.