Investing vs.Trading: What’s the Difference?
Investing and trading are two distinct approaches to profiting from the financial markets. In general, investors buy and hold assets to achieve higher returns over a longer period of time. Traders, on the other hand, use both rising and falling markets to enter and leave positions more quickly to gain smaller, more frequent profits. In this guide, we’ll break down what distinguishes investing and trading in more detail.
When you hear investing, think of long-term money-making. Investing is the process of purchasing and holding a portfolio of stocks, baskets of stocks, mutual funds, bonds, and other investment instruments with the purpose of building wealth over time. In fact, even those with a 401(k) or an IRA are investing. This means that, unlike traders, investors may not be checking the performance of their holdings each day.
To determine which stocks to invest in, investors will consider market fundamentals like price-to-earnings ratios and management prediction. Using these evaluations, investors will ride out downtrends. These stocks are often held for years or even decades so that you can earn interest, dividends, and stock splits. Compounding or reinvesting these profits and dividends into additional stock shares is a common way investors seek to increase their overall profits.
Focused on the opportunities of the day-to-day, traders typically engaged in more frequent transactions, always keeping an eye toward modest market mispricings on which to capitalize. These transactions will involve the buying and selling of stocks, commodities, or currency pairings. A trader’s goal is to outperform their buy-and-hold investment in terms of returns.
Unlike buy-and-hold investors, traders aim to make money quickly and may even employ techniques like short selling (selling at a higher price and buying to cover at a lower price to profit in falling markets) and using a protective stop-loss order (to shut off lost positions at a predetermined price level) to do so.
There are four main kinds of traders which each have a different style and asset holding style:
- Day Trader: Positions are held only throughout the trading day and no nighttime positions are held.
- Swing Trader: Positions are held for a period of time ranging from days to weeks.
- Position Trader: Positions are kept for a period of time ranging from months to years.
- Scalp Trader: Positions are held for seconds to minutes at a time, with no overnight holdings.
Here are a few smart tips that apply to both investors and traders:
- Make a buying and selling strategy and stick to it.
- Calculate how much you can afford to lose and never put in more than that.
- Make sure you understand your taxes, specifically short- and long-term capital gains.
But nothing compares to learning from real people’s trading activity like you can on Alpha Impact’s social trading. Don’t miss out on the fun (and the funds) — join the Alpha Impact community today.
About Alpha Impact
Crypto Made Easy.
Alpha Impact is a social trading platform designed to bring trust to crypto trading. Whether you want to automatically copy an expert trader or you’re already a crypto trader and want to build and monetize your following, we’re building the infrastructure to take the guesswork out of crypto trading.
Traders on the Alpha Impact platform are some of the top-performing traders in crypto. In good markets or bad, our traders are incentivized to share their trades and trading strategies through the Alpha Impact platform. Finally, a place where users can filter through the noise and learn about crypto trading from experts with a visible track record. What’s even better is that traders have an incentive to share their investment thesis, analysis of the market, and the reasons behind their trades.
We share our fees with traders, meaning that there is finally an incentive for expert traders to share their activity and views with crypto enthusiasts and beginners.
Built by experts from the traditional finance space, our philosophy is to empower everyone to become a crypto trader. Whether you’re a beginner wanting to learn from an expert, or an expert wanting to get paid, we’re here to democratize access to this industry, one trade at a time.