Trading Vs Investing — What is the Difference?

Trading is done when a person looks for opportunities in the marketplace, both in an uptrend as well as in a down trend. They prefer to take short term profits, as opposed to taking long positions for a longer period of time.

When a person is investing, he looks for value, and use the buy and hold strategy (usually used for stocks). For example, buying a stock and holding it for a long period of time in the stock market. If the stock goes down, his options might be either sell it and cut losses, or to keep on holding it until the stock price recovers. Returns can take a long time, as some investors might hold a stock for years, or even half a lifetime!

Professional traders are able to buy or sell depending on the market trends. They would be looking for momentum opportunity and benefits from both the up and down of the market cycles. In an uptrend, they would buy as the momentum accumulates, and then sell it for a higher price (exit the trade), when they see the momentum starting to slow.

In the forex market (foreign exchange currency or fx market), traders can also take short positions (sell first, and then buy back to cover the short position later). In a market down trend, traders sell first, when they see the momentum of the market trend going further down building up, and they buy back to cover the short position, at a lower price. (Short selling is not allowed to be done in the stock market.)

Interestingly, there is a common belief that long term investments carry lower risk. This belief influences investors to hold on to their stocks for a long time. When the market goes down, they hold it, and wait for it to go back up. And when the market goes up, they still keep holding it, hoping that it will still go up further. Well, that does make it long term!

Professional traders reap the easy to reach low hanging fruits first and do not take on unforeseen future market risk. Returns build up fast as profits are taken quickly.