Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds and other investment instruments. Investors often enhance their profits through compounding, or reinvesting any profits and dividends into additional shares of stock. Investments are often held for a period of years, or even decades, taking advantage of perks like interest, dividends and stock splits along the way. While markets inevitably fluctuate, investors will "ride out" the downtrends with the expectation that prices will rebound and any losses will eventually be recovered. Investors are typically more concerned with market fundamentals, such as price/earnings ratios and management forecasts.

Trading, on the other hand, involves the more frequent buying and selling of stock, commodities, currency pairs or other instruments, with the goal of generating returns that outperform buy-and-hold investing. While investors may be content with a 10 to 15% annual return, traders might seek a 10% return each month. Trading profits are generated through buying at a lower price and selling at a higher price within a relatively short period of time. The reverse is also true: trading profits are made by selling at a higher price and buying to cover at a lower price (known as "selling short") to profit in falling markets. Where buy-and-hold investors wait out less profitable positions, traders must make profits (or take losses) within a specified period of time, and often use a protective stop loss order to automatically close out losing positions at a predetermined price level. Traders often employ technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups.

A trader's "style" refers to the timeframe or holding period in which stocks, commodities or other trading instruments are bought and sold. Traders generally fall into one of four categories:

  • Position Trader – positions are held from months to years
  • Swing Trader – positions are held from days to weeks
  • Day Trader – positions are held throughout the day only with no overnight positions
  • Scalp Trader – positions are held for seconds to minutes with no overnight positions

Traders often choose their trading style based on factors including: account size, amount of time that can be dedicated to trading, level of trading experience, personality and risk tolerance. Both investors and traders seek profits through market participation. In general, investors seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter timeframe, taking smaller, more frequent profits.


  1. Are Bollinger Bands® used for investing or trading?

    Find out how investors or traders would use Bollinger Bands and why they are more useful for technical traders than long-term ...
  2. Why would a growth investor purchase shares of companies in the drug sector?

    Learn why growth investors looking to beat the market gravitate toward the drugs sector, particularly the newer, high-tech ...
  3. What is a good annual return for a mutual fund?

    Explore the question of what constitutes a good annual return from investing in mutual funds and the factors that affect ...
  4. How is the 80-20 rule (Pareto Principle) used in portfolios?

    Learn how the 80-20 rule can be used in portfolio construction, as well other areas, and learn about the origins of Pareto's ...
  1. Sharpe Ratio

  2. Exchange-Traded Fund (ETF)

  3. Warren Buffett

    Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire ...
  4. Smart Beta

    Smart beta defines a set of investment strategies that emphasize ...
  5. Discretionary Investment Management

    A form of investment management in which buy and sell decisions ...
  6. Account Minimum


You May Also Like

Related Articles
  1. Charts & Patterns

    Are Bollinger Bands® used for investing ...

  2. Trading Strategies

    Market Timing Tips & Rules You Should ...

  3. Mutual Funds & ETFs

    Is Amazon a Prime Pick for Your Portfolio?

  4. Mutual Funds & ETFs

    Should You 'Like' Facebook in Your Portfolio?

  5. Mutual Funds & ETFs

    Google: Should It Be Part of Your Portfolio?

Trading Center