When it comes to talking about the stock market, the subjects of investing and trading often get confused but to my mind they are not the same.
There is an overlap between investing and trading because when you invest in the stock market, you must buy and sell shares, which is trading, so the two subjects are obviously related somehow.
So what’s the difference?
As explained in my previous article, “What Is Investing?”, this concerns “laying out for profit”.
In other words, investing involves buying something (an asset) and holding on to that asset for a while, with the sole purpose of making a profit from it.
When you invest in an asset in this way, there are two ways that you can make a profit from it.
The first way is to sell the asset for a higher price than you bought it for.
This is known as a capital gain.
The second way is to earn an income from the asset during your ownership.
This could be in the form of interest, dividends, rent, or similar.
In its simplest sense, trading is simply the buying and selling of something, in this case, shares.
However, when trading is used in the context of the stock market, it often implies the frequent buying and selling of shares.
In other words – day trading – which involves holding shares for just a few hours – days, at most.
6 Key Differences Between Investing & Trading
As we can see straight away then, investing is more concerned with the long-term whereas trading is more concerned with the short-term.
Hence, traders are focused on news flow, short-term trends and share price momentum (making the trend continue) whereas investors are focused on the underlying business of the company shares and the drivers of its longer term profits.
Thirdly, investors can enjoy receiving dividends (income) because they hold the shares for long enough for them to be paid (usually every 6 months) whereas traders rarely hold their shares for long enough to benefit.
Hence, investors can enjoy a passive income from their shares whereas traders usually can’t.
It also follows from this that making money from trading is a time-consuming activity because you need to be continuously buying and selling shares and finding new trading opportunities.
Whereas investing is largely a buy and hold strategy for which it is better to trade much less often, hence this is much more of a passive activity.
Every time you buy or sell shares, you have to pay your stock broker a fee to do that for you, which eats into your profits.
So the more often you trade, the higher your transaction costs.
Hence, buying and selling the same shares to try to ride the price rises and avoid the price falls will incur much higher transaction costs than buying the shares once and holding them for a longer period.
Investing & Trading Strategy
With so many key differences between investing and trading (and this is not an exhaustive list), it is easy to see how an investing strategy and a trading strategy are fundamentally different whilst being linked at the same time.
Whether you are a short-term trader or a long-term investor, you will need to have an investment strategy as well as a trading strategy.
Your investment strategy will tell you what kind of shares you will invest in and why.
Your trading strategy will tell you when to buy and sell your shares and how long to hold them for.
Stock Market Software
Irrespective of whether you are an investor or a trader, you are going to need company data, charts, etc. to help with your analysis and there are a myriad of different indicators and trading systems that you can use.
I have been using a particular system, call Sharescope for many years now.
It might be worth you checking it out for yourself – you never know, you might find it useful too.
The version I use comes with end-of-day prices but it is also available with real-time data for the aspiring day traders among you.
If you want to save 25% on the upfront cost then make sure you follow one of my ads or links to get the “How To Invest In Shares” special offer that I’ve negotiated for you.
If you don’t like Sharescope (maybe because you use a Mac instead of a PC or your prefer to use Internet-based software), there is an alternative that I use as well.
Stockopedia is a relatively new system, which I have been using since August 2013 and I recommend it too.
Access it through one of my links or adverts and you can access a similar “How To Invest In Shares” special offer of 25% discount – in this case £50 off the annual subscription.
Perhaps check them both out yourself and see which one you prefer…or if you’re like me and like them both…get both!