The Difference Between Trading and Investing
If I ask you about stock trading, you might think of the New York Stock Exchange.
That’s where traders meet to buy and sell stocks, yelling out prices for their clients.
But now, trading is different.
Most of it happens online.
Technology lets regular people trade from home, hoping to make money.
Even though trading and investing both deal with stocks, they are not the same.
Trading is when people buy and sell stocks quickly to make money.
Investing is when people buy stocks and keep them for a long time, hoping they will grow in value.
Some people do make a lot of money from trading, but it’s usually not a good idea for most people.
We will talk about why in this article.
Now before we start, this is Ivan here from the Vanilla Investor, a former investment analyst and with over $100k invested in the markets.
My goal is to bring you simple finance at your fingertips.
Today, we will look at:
- What trading and investing mean.
- The two main differences between trading and investing:
- how long you hold stocks
- and how you study them.
- Why trading seems exciting.
- And lastly, can you make a full-time living from trading?
So without further ado, let’s get started!
Defining Trading And Investing
If you look at the simple meanings of investing and trading, they might seem the same.
Investing is when you spend money now hoping to get more money later, like making a profit.
Trading is when you buy and sell things like stocks.
There’s no strict rule that says what is trading and what is investing, but they are really different ways to make money.
An investor puts their money into something and waits for it to grow over time.
They make money as that thing gets bigger and more valuable.
A trader, on the other hand, buys and sells stocks quickly to make money fast.
So, investing is about watching your money grow slowly, while trading is about making money by buying and selling a lot.
How Timing Differs Between Traders And Investors
Being a trader can mean different things.
Some companies hire traders to help them decide the best times to buy or sell stocks.
For example, a company might hire a trader to buy shares of Starbucks at the best price.
But today, we're talking about people who trade stocks to make money for themselves.
Trading and investing are different in two big ways: how long you hold onto stocks and how you look at their value.
When you invest, you usually keep your money in a stock for a long time, hoping that the company will grow and make more money over many years.
You might hold onto a stock for five, ten, or even more years.
Investors may buy stocks when their prices are low and then wait for the company to grow, focusing on long-term success rather than short-term changes in price.
On the other hand, trading is all about making quick moves.
Traders buy and sell stocks to make money from small changes in price over a short period.
For example, day traders buy and sell stocks on the same day.
Swing traders might keep stocks for a few weeks or months, and some traders buy and sell within seconds!
Traders do a lot of trading and often switch their stocks quickly.
But just selling a stock soon after buying it doesn’t make you a trader.
Now, let's talk about how traders and investors look at stocks.
Investors care about how a stock will grow over time.
They believe that even if the price goes up and down now, the stock will be worth more in the future.
Traders, however, focus on the stock's price right now and how it might change in the next few moments or days.
They look at trends and patterns to decide when to buy or sell, often without thinking about the long-term value of the company.
They try to make quick profits based on the current price changes.
To understand how traders and investors analyze stocks, we need to talk about the difference between a stock's price and its real worth, which is called its intrinsic value.
But first, if you are enjoying this and you want to learn more about investing and personal finance, then I would appreciate it if you can join my free newsletter here.
How Much is a Stock Truly Worth?
The price of a stock shows how many people are buying or selling it right now.
But each stock also has a “true worth,” which is what it’s really worth.
This true worth isn’t always clear.
Ideally, the stock price should match this true worth over time, as investors learn more about the company.
But sometimes, feelings like fear or greed can make the stock price different from what it’s actually worth.
In investing, people handle this in two main ways.
First, passive investors don’t worry about the short-term ups and downs of stock prices.
They focus on the long-term growth of the stock’s true worth.
They believe that even if they buy a stock at a high price today, it will be worth more in the future as the market grows.
Second, active investors try to figure out the stock’s true value.
They aim to buy the stock for less than its true worth.
This way, they can make money both from the increase in its true worth and when the stock price eventually matches its true value.
Both kinds of investors believe that the stock’s true value will go up over time.
Traders, however, only care about the stock’s price right now.
They don’t try to find out its true worth.
Many traders buy and sell stocks without knowing much about the companies.
They just want to make quick money from the stock's price moving up or down in the short term.
How Traders And Investors Analyze Stocks
For this reason, traders often use something called technical indicators to decide when to buy or sell stocks.
These are special tools and charts that look at past stock prices to see if there are any patterns that might happen again.
Imagine a trader sitting with lots of computer screens full of graphs and charts—this helps them decide when to make quick trades.
Some traders also pay attention to news about companies.
For example, if they hear that a company is going to share big news tomorrow, they might buy the stock today, hoping the price will go up when the news comes out.
In general, traders focus on small bits of information to make fast decisions.
They don’t usually try to understand everything about the whole company.
Why Does Trading Sounds So Alluring?
Trading and investing are not the same.
Trading is a bit like playing a fast-paced game where you need to be quick and clever.
Sometimes, people say that trading involves a bit of trickery.
In the old days, traders would talk face-to-face and try to hide their true plans about buying and selling to get the best deals.
Even now, traders often keep their real intentions secret to get an advantage.
Trading can seem very exciting, especially for young people.
It’s all about making quick deals and hoping for fast money.
You might see ads with rich people on private jets or fast cars, saying how they got rich quickly through trading.
It might look easy to get started, but trading is very risky.
Traders often use a lot of money and sometimes even borrow money to try and make more, which means they can lose a lot quickly if things go wrong.
Trading also takes a lot of time and hard work.
Many trades only make a tiny bit of profit, so traders have to keep looking for new opportunities to make money.
For beginners, it’s really hard to succeed because you often don’t have all the information and you’re up against professionals with lots of money, advanced tools, and super-fast computers that can trade much quicker than you.
It’s not a fair game.
Can You Make a Full-Time Income With Trading?
I’m not saying you can’t make money from trading.
Some people make a living by trading from home, and some companies even pay traders to help them.
So, trading can be worth it.
But trading is a bit like playing a game of poker.
You can be really good at it, and some people do make money this way.
However, there’s a lot of luck involved, and you’re often playing against very skilled people.
This means the chances are not always in your favor.
Most people who give financial advice will probably say that investing is better for most of us, like me.
When you do careful research and hold onto your investments for a long time, you’re more likely to benefit as the whole economy and stock market grow.
Sure, it might not be as exciting as making a risky trade.
But that’s probably a good thing.
If you’re just looking for excitement and don’t mind losing, you might as well go to a casino—you’ll even get free drinks there!
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Thanks for reading, cheers!
- Ivan