Whether you’re new to investing or a seasoned trader, knowing the difference between investing and trading can help you make better decisions. While both stock trading and investing involve buying and selling assets to earn money, they differ in many ways to impact your end goal.
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What is Stock Trading?
Stock trading is an individual who buys and sells stocks through different transactions with other market participants to profit by offering higher prices than what they originally purchased them for. This method is often called speculating since the investor doesn’t own the underlying asset like in investing. Instead, they make bets on how the price of an asset will change over time.
What is Stock Investing?
On the other hand, stock investing refers to buying stocks to hold those shares for an extended period since you believe their prices will go up over time. In this case, your goal as an investor is to gain from capital appreciation and dividends. The main difference between these two methods is that investors take a longer-term view toward acquiring securities while traders don’t hold onto any stock position for more than a few months at a time. Trading tends to be riskier because the speculator does not control his positions and risks losing money if the market moves against him.
Stock Trading vs Investing: Pros and Cons of Each Approach
To further illustrate how investing and trading differ, we can compare a few more metrics:
Profitability
Trading tends to be more profitable than investing because traders benefit from short-term price fluctuations. At the same time, long-term investors get virtually no action until they choose to sell their stocks. This method comes with higher risk because traders don’t control their positions and can lose money rapidly when things go wrong.
Liquidity
Liquidity can convert an asset into cash quickly without affecting its market value too much. Cash (or cash equivalents like Treasury bills) offers the highest degree of liquidity, while illiquid assets like real estate may require a long time before you can sell them and get your money back. This group’s due to how fast traders can move in and out of stocks, but it’s still possible to lose money if you don’t know what you’re doing.
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Investors have less liquidity because they typically hold their portfolios for more extended periods. In addition, many companies offer investors poor or no liquidity by restricting secondary trades in shares that people already own even when there are more than sufficient buyers and sellers available to complete the transaction. Furthermore, large blocks of stock (such as those worth $100 million) go through an official block trading process, which helps reduce market impact and makes it easier for the purchaser to acquire this asset.
Capital Gains Taxes
It’s probably one of the most significant differences between trading and investing. Securities that are traded multiple times in a year (sometimes called “tax lots”) must be continuously tracked by investors to determine how much each trade affected their total buy-in cost.
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As such, investors will need to pay capital gains taxes on any investments they make unless these shares are held in an IRA or other tax-advantaged account, which can save you thousands of dollars per year in taxes. However, traders only have to worry about paying taxes when they sell their shares since there won’t be any additional gains after being sold.
Conclusion
Keep in mind that neither one of these strategies is superior to the other in all cases. It’s possible (and even likely) for an investor and a trader to achieve success while using different approaches. In short, traders are looking for short-term profits while investors are waiting for gains over a more extended period. Before investing their money, new investors should use reputable online brokers like Saxo bank and trade on a demo account.
