Many a novice investor believes that “investing” and “trading” are synonymous with one another—and it’s an understandable misconception. The terms are often used interchangeably by even the most seasoned of Wall Street professionals.
But in fact, these terms are defined by two distinctly different strategies. And understanding those differences is imperative in making an informed decision about which is the right one for you.
There are several.
To start, the goal of most investors is to accumulate steady profits over the long term. This is usually accomplished through a buy-and-hold strategy; investors build a diversified portfolio of stocks, bonds, funds, and various other investment vehicles, which they expect to mature and deliver strong returns over time. (By the way, if you have an IRA or 401(k) account, you’re invested.)
They’re more selective, and their choices are generally based on the investment’s fundamentals. They’re also generally willing to allocate larger position sizes to their holdings.
Because investments are typically held for the long term, investors may benefit from factors like acquisitions and spin-offs, as well as dividends and interest. And since the economy is generally expected to grow and move forward over time regardless of downtrends, shorter-term fluctuations (theoretically) won’t impact investors over the long term—at least not those who can withstand the price swings.
Traders, on the other hand, are more hands-on and active in the markets. They buy and sell their holdings (often quickly and frequently) to take advantage of shorter-term changes in the market, with the goal of outperforming a buy-and-hold strategy. They also tend to be less selective in their positions, choosing instead to devote smaller amounts of capital to a larger number of holdings.
Traders focus less on fundamentals than do investors, preferring instead technical analysis (which tracks market movements using tools like charts and moving averages). Various investment instruments and markets lend themselves best to trading, like the currency market, stocks, and commodities.
What’s best for you comes down to your own personal attributes as an investor. These include:
It’s important to note that investing and trading are not mutually exclusive. Both can be part of a balanced market strategy. But both don’t always appeal to everyone. And one is not inherently better than the other.
Depending on your goals and needs, either has the potential to deliver the returns you’re looking for. You just need to decide which is right for you.
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