You might have heard the terms “trading” and “investing” used interchangeably in relation to buying stocks. But they have key differences and can't always be swapped one-for-one.
By better understanding both terms, you can decide whether trading or investing (or both) is right for you.
Take our quiz: Which investment account is right for you?
What is investing?
Investing involves purchasing something with the hope it will grow in value over time. For example, investors buy a stock to increase the value of their original investment with any potential returns — taking on any risk of loss as well.
Types of investing strategies
A few examples include:
Value investing: Investing in stocks lower in price than competitors or undervalued by other investors.
Growth investing: Investing in stocks with growth potential and characteristics that beat competitors.
Dollar-cost-averaging: A strategy where a fixed amount of money is invested at regular intervals, regardless of the asset’s price.
Dividend investing: Buying stocks in companies that regularly distribute a portion of their profits to shareholders.
Buy-and-hold investing: A long-term investment strategy that adopts passive investing and has nothing to do with market timing. For example, you may buy and hold a stock for decades until you retire.
Index investing: A typically low-cost way to invest in markets. You can invest in them through mutual funds and exchange-traded funds (ETFs).
Income investing: Generating active income for you. For example, you may invest in dividend stocks, which pay a dividend over regular periods.
Robo investing: A portfolio that is fully automated or is minimally managed by a human. This type of account is often employed by the more hands-off investor.
Socially responsible investing (SRI): Investing in companies that believe in social change.
Are there other types of investing? Absolutely. Researching your choices can help you determine which investing type makes the most sense with your goals, time horizon and risk tolerance.
What is trading?
Stock trading means buying and selling stocks, or individual shares of companies, with the goal of making money on price changes — usually through a brokerage account, such as Ally Invest's Self-Directed Trading. Traders typically try to buy stocks at a low price and sell them for a high price to benefit from these price changes. It can be risky because you can lose money when trading stocks when things don't go your way.
Types of trading
A few examples of trading strategies include:
Technical trading: Analyzes market data like price and volume to predict future price movements and identify short-term trading opportunities.
Fundamental trading: Evaluates a security’s intrinsic value based on economic and financial factors, such as earnings and market conditions, to identify long-term investments.
Day trading: Involves buying and selling with an eye on short-term price movements (often in less than a day).
Swing trading: Attempts to capture short-term gains over a longer period, such as days or weeks.
Scalping: A trading strategy that focuses on a stock's minor price changes. As a scalper, you might place a handful to a few hundred trades in a single day to try and benefit from potential small price moves, not necessarily huge changes in stock prices.
Options trading: A contract that gives a trader the right to buy or sell an asset at a fixed price for a specific period of time.
Margin trading: When you borrow money to invest in a particular security.
Trading vs. investing: Key differences
You might have heard of the square and rectangle analogy. Trading could be considered a type of investing, but investing is a much broader spectrum beyond making trades. While timing is the biggest difference between investing and trading, it’s important to understand the other differentiators.
Considerations | Trading | Investing |
|---|---|---|
Time horizon | Short-term (minutes to weeks) | Long-term (years) |
Risk tolerance | Higher risk, including potential for significant losses | Lower risk, relies on potential long-term upward trends |
Strategies and goals | Active, frequent buying and selling focused on short-term profits by taking advantage of price fluctuations | “Buy and hold” with a focus on potential long-term wealth accumulation through compounding and dividends |
Costs and tax implications | Typically higher due to frequent buying and selling | Typically lower due to fewer trades over a long period |
Which approach is right for you?
Remember, there's no one-size-fits-all approach, and you can do both. Consider your investing style, goals, risk appetite and timeline to help you decide.
