The Difference Between Trading and Investing

Why It Is Important to Understand Investing vs Trading

When I first started trading in the stock market, I did not understand the difference between trading and investing. I assumed it was all one and the same. I was very wrong! If you want to become a successful trader or investor, you need to-

Understanding the difference between trading and investing is important so you can -

1. Choose a style that fits your goals, risk tolerance, and time that you can commit to managing your portfolio.

2. Focus on learning one avenue first before taking on different strategies

So what are the differences?

Scalping

Scalping is a very short-term trade cycle and is VERY RISKY. Scalping is a trading style that specializes in profiting off of small price swings and making a fast profit off reselling. In day trading, scalping is a term for a strategy to prioritize making high volumes off small profits. Scalping requires a trader to have a strict exit strategy because one large loss could eliminate the many small gains the trader worked to obtain. Thus, having the right tools—such as a live feed, a direct access broker, and the stamina to place many trades—is required for this strategy to be successful.

Day Trading

Day trading means buying and selling a batch of securities within a day, or even within seconds. It has nothing to do with investing in the traditional sense. It is exploiting the inevitable up-and-down price movements that occur during a trading session. Day traders are attuned to events that cause short-term market moves. Trading based on the news is one popular technique. Scheduled announcements such as the release of economic statistics, corporate earnings, or FOMC announcements are subject to market expectations and market psychology. That is, markets react when those expectations are not met or are exceeded—usually with sudden, significant moves which can greatly benefit day traders. The profit potential of day trading is an oft-debated topic on Wall Street. Internet day-trading scams have lured amateurs by promising enormous returns in a short period of time. Some people day-trade without sufficient knowledge. But there are day traders who make a successful living despite, or perhaps because of the risks.

Swing Trading

Swing trading is a style of trading that attempts to capture short- to medium-term gains in a stock (or any financial instrument) over a period of a few days to several weeks. Swing traders primarily use technical analysis to look for trading opportunities. Typically, swing trading involves holding a position either a long or short position for more than one trading session, but usually not longer than several weeks or a couple of months. This is a general time frame, as some trades may last longer than a couple of months, yet the trader may still consider them swing trades. Swing trades can also occur during a trading session, though this is a rare outcome that is brought about by extremely volatile conditions. The goal of swing trading is to capture a chunk of a potential price move. While some traders seek out volatile stocks with lots of movement, others may prefer more sedate stocks. In either case, swing trading is the process of identifying where an asset’s price is likely to move next, entering a position, and then capturing a chunk of the profit if that move materializes. Successful swing traders are only looking to capture a chunk of the expected price move and then move on to the next opportunity.

Buy and Hold

Buy and hold is a passive investment strategy in which an investor buys stocks (or other types of securities such as ETFs) and holds them for a long period regardless of fluctuations in the market. An investor who uses a buy-and-hold strategy actively selects investments but has no concern for short-term price movements and technical indicators. Many legendary investors such as Warren Buffett and Jack Bogle praise the buy-and-hold approach as ideal for individuals seeking healthy long-term returns. Conventional investing wisdom shows that with a long time horizon, equities render a higher return than other asset classes such as bonds. There is, however, some debate over whether a buy-and-hold strategy is superior to an active investing strategy. A buy-and-hold strategy has tax benefits because the investor can defer capital gains taxes on long-term investments. To purchase shares of common stock is to take ownership of a company. Ownership has its privileges, which include voting rights and a stake in corporate profits as the company grows. Shareholders function as direct decisions makers with their number of votes being equal to the number of shares they hold. Shareholders vote on critical issues, such as M&A activity, and elect directors to the board. Activist investors with substantial holdings wield considerable influence over management often seeking to gain representation on the board of directors. Recognizing that change takes time, committed shareholders adopt buy-and-hold strategies. Rather than treating ownership as a short-term vehicle for profit in the mode of a day trader, buy-and-hold investors keep shares through bull and bear markets. Equity owners thus bear the ultimate risk of failure or the supreme reward of substantial appreciation.

The Wrap-Up

You have to choose what type of investor or trader you want to be. You can become both an investor and a trader. All it takes is education and experience.

In the Disciplined Traders Academy, we focus on teaching students new to the market the skills they need to swing trade equities, establish reward-to-risk ratios, and take profits along the way.

Interested in joining our free Facebook community and start learning how to swing trade the stock market? Click the join now button and get ready to learn!