If you’re just starting out in the financial industry, you may be wondering what the difference between investing and trading is. They’re often used interchangeably, but they mean different things. Traders speculate on prices while investors purchase investments with the expectation that they will rise in value over time and be sold at a later date at an increased price.
Investing and trading have become extremely trendy terms in the world of finance over the past few years, with everything from investment clubs to day trading becoming more popular than ever before. Many people are often unsure of the difference between investing and trading, especially when so many of the terms used in each industry can be confusing without context. If you’re looking to get involved in either one or both of these industries, it’s important to understand their key differences first before diving in headfirst and risking your hard-earned money with no knowledge of what you’re doing.
The Differences Between Investing and Trading
Investing and trading are two related but distinct elements of a healthy financial life. While many people use these terms interchangeably, it’s important to understand that they have very different meanings, goals and outcomes. Investing involves pooling your money together over time into one or more investments in order to create growth or income over a long period of time through dividends, interest payments and/or stock appreciation.
A trader, on the other hand, buys and sells stocks, bonds or other securities on an ongoing basis with an eye toward short-term gains. Traders might also dabble in day trading—buying and selling stocks within a single day—but even then their focus is still on shorter-term results than investors who trade only occasionally. Here’s how investing differs from trading
Time frame: An investor holds onto his investment for months or years, while a trader tends to hold onto his position for days at most.
Goals: An investor looks at total return (income plus capital gain) while a trader looks at capital gain alone.
Capital requirement: Investors need to invest large sums of money to see big returns, while traders can start small and work their way up as they become more experienced.
Regulation: Investors must follow rules set by federal agencies such as the Securities and Exchange Commission (SEC), which governs all aspects of trading, including what information must be disclosed to investors. In contrast, there are no federal regulations governing individual traders; each brokerage firm has its own policies about what you must disclose when you buy or sell a security. This means you should read your brokerage agreement carefully before signing up so you know exactly what rights and responsibilities you have under their policy.
Tax treatment: Investors pay taxes on any profits they make after holding onto an investment for 12 months or longer. Since a trader never holds onto an investment long enough to qualify as a long-term holding, he doesn’t pay taxes until he sells his holdings.