What's the Difference Between Trading and Investing?

The difference between trading and investing typically comes down to the duration of time you’re intending to hold a position for. However, there’s no set time difference between the two, and different people will give different definitions.

The Difference Between Trading and Investing

We tend to think of trading as a market transaction where you’ll hold an asset for less than a month. If you’re initially planning to hold for longer than a month it tends to fall more into the investment time-horizon.

Essentially trading is the buying and selling of assets to make a profit in the short term. A trader's focus is on short-term price movements and they often own an asset for just a few hours, days or weeks.

On the other hand, investing is having a position in an asset with the intention of holding for as long as needed for the asset to fulfil its purpose. In some cases that might be for asset value growth (or decline in some cases), in others it might be to diversify a portfolio, for shares in companies (equities) some investors do it to receive a dividend payment, or even to gain more control over the company. In general, this all means holding for a longer period, sometimes decades in the case of bigger investors such as pension funds. Investors focus on the long-term performance of their investments and are less concerned with short-term day-to-day price fluctuations.

We can also make a definition based on our intentions:

• A trader is taking advantage of what they see as a short-term opportunity in the way an asset is priced or how the markets are behaving.
• An investor is making a judgement based on the value or potential of the asset itself.

However, other people may define these differently and not everyone who defines themselves as a trader or investor will fit neatly into one box or the other.

Another key difference between the two is the level of risk. Trading is higher risk due to the exposure to short-term fluctuations, while investing has more stability, but usually with lower comparative potential returns.

Although both will involve psychological challenges, it’s usually the case that trading has much more of a mental game involved as traders are influenced by the short-term movements, and this can often cause traders to take inappropriate actions that lead to poor performance. Investors can also go through similar psychological challenges, but in general they tend to be less damaging to performance.

However, it's a common misconception that you have to be one or the other. People online like to label people as either traders or investors, but many successful market participants do a bit of both. In fact, if you’re mainly focused on trading, as you grow your capital it can be a good idea to start moving some of your money into longer term investments and think of your trading account as being part of the riskier portion of your overall portfolio.