If investing is like watching a movie, trading can be like swiping through social media clips. Both are forms of entertainment, but in one case you're much more involved in the process than the other.
Watching a movie vs. swiping social media
When you decide to watch a movie, you likely look over some choices, make a selection, then sit back and relax for the next 2 hours or so.
On the other hand, if you're scrolling through social media on your phone, you're constantly making decisions, choosing how long to view various clips, and quickly moving on from one thing to another.
In many ways this sums up the differences between investing and trading. Both include buying shares (or fractions of shares) of stocks, funds, or other investments with the goal of making money—what's different is how active you are in doing so.
What is investing?
With investing, you typically buy shares of stocks, mutual funds, or ETFs, then keep them for a long period of time (often gradually increasing the amounts as you go). Your goal is to see the earnings from your investments compound and potentially grow over years, or even decades.
So just like watching a movie, you want to commit to it for a while. And even though you should have a basic idea of what's going on with your investments, you may just check in on them every now and then, or when something big happens with the market or a company you've invested in.
What is trading?
With trading, you usually buy and sell shares frequently with the hope of making a quicker profit. This is trickier, since the market is unpredictable in the short term. You need to be regularly paying attention, closely monitoring and keeping track of what the companies you've bought into are doing.
Like watching clips on your phone, you're actively involved the entire time—repeatedly making decisions on how long to stick with one thing and when to try something else.
Differences between investing and trading
Let's look at 2 simple examples.
- If you're investing, you might buy a mutual fund and hold on to it for several years.
- If you're trading, you might buy a stock and try to sell it shortly after for a higher price.
Check out the chart below for a high-level summary of the general differences between them.
|
INVESTING |
TRADING |
|
|
Timeline: |
Long term—years, decades |
Short term—daily, weekly, monthly |
|
Involvement: |
Minimal, occasional check-ins |
Frequent, regular buying and selling |
|
Research: |
Prior to making investments |
Throughout the entire process |
|
Goal: |
Gradually build wealth over time |
Capitalize on short-term market movements |
|
Risk appetite: |
Generally more tolerant of short-term market fluctuations |
Generally riskier, more time-consuming, and stressful |
Key considerations
In either case, it's important to have a plan. You should know in advance what you are hoping to accomplish, consider how much risk you are willing to take, and decide how long you want to put your money on the line for. Buying and selling securities is generally riskier in a shorter timeframe (with less time to make up for losses), a common challenge for traders.
Since you can always lose money, it's essential to know what you're doing before you make any decisions. Don't plan on trading until you have the time to research and learn, with the attention to do it the right way. Successful trading can require dedication, discipline, and strict money management controls, and even then, there are no guarantees.
