Both investing and trading are ways to make profits in the stock market, but they use different approaches to reach that goal. On the one hand, investors look for the value of a company and its potential growth in the long-term, holding on to stocks through the market’s volatile periods. On the other hand, traders hold stocks for quick periods of time, looking at the direction stock prices will move to in order to take advantage of small price changes in the short-term.
Choosing which approach to take depends on the focus one takes on stocks. Investors study and analyze a stock’s value because they intend to buy it and keep it for a long period of time. They need to be patient and understand that they won’t see profits in the short-term. Contrarily, traders look for stock market mispricings to take advantage of them. They need to devote more time to spotting opportunities and trade at the right moment to make continuous small gains.
What investors do
Investors engage mainly in value investing, which means understanding the underlying value of the stock they are buying. Investors look to buy stocks at a discount price, knowing their price will rise in the future.
For example, an investor that has closely studied a health technology company is certain that it is underpriced so he buys some stocks hoping that the market will recognize the company’s intrinsic value and its stock’s prices will increase. After this happens, the investor can sell his stocks and reap his long term gains.
What are the benefits of investing?
- Investing is a safe way to build long term gains
- Once you invest in a stock, it does not require much attention. You just need to wait a long period of time (years) until its price has substantially increased.
What are the disadvantages of investing?
- Investors need to commit for the long run and have patience and discipline even though they might feel insecure through the market’s ups and downs
- Profits will come after many years of holding the stocks
What traders do
Traders engage in situational investing, which is finding unusual situations where a stock is priced incorrectly. For example, a trader is looking at a company which imports rubber to produce shoes. He notices that there is a crisis in the foreign country and knows that the shoe company’s stock value will go down because the rubber imports will stop, so he buys the stocks when their price has gone down and he will sell them when they come back up.
In order to do this, traders need to be constantly monitoring the markets to find these quick errors and take advantage of them. Given that the markets correct themselves in a rapid manner, traders need to be agile when spotting these opportunities before someone else does.
Read also: Day Trading basics for beginners
Traders also perform growth investing, which means investing in companies that are expected to have above market gains and whose value will increase compared to the industry. However, these companies are not always expected to grow at higher rates due to their underlying value, but because they’re overvalued. This strategy relies on maximizing capital gains, which occur when an asset is sold for a higher price than what it was purchased for.
Types of traders
There are different types of traders and timing is the main difference among them.
- Day traders buy and sell stocks within a day or even multiple times during a day. This type of trading requires the most time, since traders need to constantly monitor the markets to look for short-term fluctuations.
- Swing traders invest for typically two to six days, or for weeks, and then sell stocks
- Positional traders hold a position, mostly stocks, for longer periods of time such as weeks, months or even years
What are the benefits of trading?
- Trading allows you to make profits quickly, even in a matter of minutes
- It is easy to do. You can engage in trading from your computer and at any time of the day.
- It does not require in-depth research of companies. Traders need to focus more on the technical aspects of stocks than in the actual value of the company they are buying.
What are the disadvantages of trading?
- Trading, especially day trading, needs a lot of time devoted to it in order to make it successfully. Traders need to be well informed on the latest stock market changes and trends and be ready to make trades during any time of the day. This usually means they need to devote all of their day to this activity.
- The government will charge taxes on any short term gains or investments held for one year or less so it makes it more difficult to make a profit
- There are many professionals who are experts in trading and have access to the best technologies. This means that traders have a lot of competition, making it hard to spot market glitches.
Whether you engage in investing or trading you need to be prepared for the challenges each option offers and understand where you will find value in each type of activity.
