Trading or investing? Here's the difference
- Nov. 27, 2023
- 3 min read
What we'll cover
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Trading and investing differences
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Strategies for each method
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How to use trading vs. investing
You might have heard the terms trading and investing used interchangeably in relation to buying into the stock market. But they have differing meanings and can't always be swapped one-for-one.
We'll demystify both terms and help you better understand whether trading vs. investing (or both) fits your style.
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 traders
Identifying the best trading method for you might take time, and that's okay. Be sure to do plenty of reading up and remember that the risk of loss has no ceiling, so make sure you're prepared for that. Here are a few examples of trading strategies:
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Scalping: Scalping is 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.
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Day trading: Day trading involves buying and selling with an eye on short-term price movements (often in less than a day).
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Swing trading: Swing trading attempts to capture short-term gains over a longer period, such as days or weeks.
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Option trading: Options trading involves 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: Margin trading is when you borrow money to invest in a particular security.
What is investing?
Investing involves purchasing something with the hope it will grow in value over time. For example, investors invest in a stock to increase the value of their original investment with any potential returns — taking on any risk of loss as well.
Investing strategies
Here are a few investing strategy examples:
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Buy-and-hold investing: Unlike trading, buy-and-hold investing is 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.
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Index investing: Index investing is a typically low-cost way to invest in markets. You can invest in them through mutual and exchange-traded funds (ETFs).
Before you invest, you should carefully review and consider the investment objectives, risks, charges and expenses of any mutual fund or exchange-traded fund (“ETF”) you are considering. ETF trading prices may not necessarily reflect the net asset value of the underlying securities. A mutual fund/ETF prospectus contains this and other information and can be obtained by emailing support@invest.ally.com .
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Growth investing: As you might imagine, growth investing involves investing in stocks with growth potential and characteristics that beat competitors.
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Value investing: Value investing means investing in stocks lower in price than competitors or undervalued by other investors.
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Socially responsible investing (SRI): SRI means investing in companies that believe in social change . It might involve investing in a company that believes in social justice or has other values.
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Income investing: Income investing means generating active income for you. For example, you may invest in dividend stocks, which pay a dividend over regular periods.
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Robo investing: Robo investing is 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.
Are there other types of investing? Absolutely. Research your choices to determine which investing type makes the most sense with your goals, time horizon and risk tolerance.
Differences between investing and trading
Timing is the biggest difference between investing and trading. Stock trading keeps short-term profits in mind, while investing generally refers to a longer time horizon — think months and years.
You might have heard of the square and triangle analogy, too. Trading could be considered a type of investing, but investing is a much broader spectrum beyond making trades.
Is trading or investing right for you?
Your choice depends on your investing style, goals, risk appetite and timeline. You may intuitively already know your preferences, particularly when considering risk and whether you want to invest over hours or years.
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