The terms “investing” and “trading” are often used interchangeably but there are distinct differences between the two. In this article we explain what investing and trading are individually and assess the key differences between the two methods of gaining exposure to the financial markets.
Whether you’re new to the financial markets or looking to refine your approach, understanding the differences between investing and trading is crucial for making informed decisions about your money.
What Is Investing?
Investing involves purchasing assets with the expectation that their value will increase over a longer time period, typically at least one year. Investors typically have a longer term outlook and can hold positions in assets for a period of years at a time.
An investment approach focuses on building wealth gradually through capital appreciation and potentially dividend income.
When you invest, you are essentially becoming a part-owner in companies or assets. To position yourself as an investor a typical investing approach might follow this structured sequence of events:
- Define your time horizon (often 5+ years)
- Determine your asset allocation across different investments
- Build a diversified portfolio
- Conduct periodic reviews (quarterly or annually)
- When appropriate, rebalance your portfolio to maintain target allocation
Investing styles are primarily split into two different approaches: “active” and “passive.”
- Active investing aims to generate returns that beat the broader market.
- Passive investing aims to track the general price movements of a benchmark index, such as the FTSE 100 Index (UK100) or S&P 500 Index (SPX500).
Tip: Many investors combine elements of both active and passive approaches in their overall strategy.
Investing vs Trading: A Comprehensive Guide to Making Informed Decisions
What Is Trading?
Trading typically involves more frequent buying and selling of assets in an attempt to profit from short-term price movements. Traders might hold positions in assets from anywhere between a few seconds to weeks or months, depending on their trading style.
Adopting a trading approach requires active market participation and continuous monitoring.
Traders tend to focus on which direction an asset’s price is likely to move, rather than the reason behind it. It involves identifying short-term opportunities and gives less regard to the specific assets or markets involved.
As trading is about timing the move, not necessarily developing an in-depth understanding of an asset, traders often utilise technical analysis and price chart analysis to identify potential entry and exit points.
Tip: Trading can involve using techniques which are typically not associated with investing, such as short selling in bearish markets.
A typical trading approach might follow this sequence:
- Identify the trading timeframe – this could be as short as a few seconds or minutes, and will be less than one year.
- Develop a trading idea or rationale based on analysis
- Determine position size and risk exposure
- Implement risk controls (stop-loss orders, position limits)
- Monitor and review trades frequently
Trading encompasses various styles, from day trading (closing all positions before market close) to swing trading (holding positions for days or weeks). Each style and trading system demands different levels of time commitment and risk tolerance.
What Are the Key Differences Between Investing and Trading?
The key distinction between trading and investing lies in your intended holding period. Investing strategies typically involve much longer time horizons, whereas traders focus on short-term price moves.
There are other ways that traders and investors set up, and engage with the markets, differently. Some of these are outlined in the table below.
| Characteristic | Trading | Investing |
|---|---|---|
| Time horizon | Typically minutes to weeks | Typically years or decades |
| Monitoring frequency | Often daily or multiple times daily | Usually quarterly or less |
| Research focus | More commonly technical analysis | More commonly fundamental analysis |
| Use of leverage | Often available and used | Less common |
| Short selling | More common | Less common |
| Stop-loss orders | Typically used | Less common |
| Overnight fees | May apply (for CFDs) | Not typically applicable |
| Tax treatment | May trigger more taxable events | Often more tax-efficient |
These differences shape every aspect of each approach. Investors aim to benefit from the long-term growth trends of economies and companies, while traders must navigate daily volatility and might move in and out of positions in seconds.
One of the similarities between investing and trading is the types of assets and markets used when adopting either approach. Instruments such as stocks, ETFs, commodities, indices or cryptoassets, all provide ways to take a position whether you are intending to trade or invest in a market.
Research style: fundamental vs technical
A further difference between trading and investing relates to the type of analysis used with each approach. This distinction is less defined, and both approaches can employ either method or combine the two, but investors typically favour fundamental analysis while traders may be more inclined to use technical analysis.
Fundamental analysis
- Examines company financials, industry trends, and economic factors.
- May include the study of annual reports, earnings statements, and competitive positioning.
- This approach seeks to identify undervalued assets with long-term growth potential.
Technical analysis
- Studies price movements, chart patterns, and trading volumes.
- Filters and manipulates market data to create technical indicators.
- Commonly used tools include moving averages, support and resistance levels, and momentum oscillators.
- Aims to predict short-term price movements regardless of underlying value.
Costs and trading frequency
Trading demands a lot more time and resources than investing and higher trading volumes equate to higher administrative costs and trading fees. These costs can significantly impact overall returns, especially for frequent traders.
Trading costs typically include:
- Spreads (difference between buy and sell prices)
- Commissions per trade
- Overnight financing fees (for leveraged positions)
- Currency conversion fees (for international trades)
Investment costs are generally lower due to less frequent transactions, though may include:
- Initial purchase commissions
- Annual management fees (for funds)
- Dividend reinvestment charges
Tools and instruments
Traders often utilise trading tools that are less commonly used in traditional investing. These include:
- Contracts for Difference (CFDs): These derivative instruments allow traders to gain exposure to financial markets without owning an underlying asset. When trading CFDs, you enter into a contract with the broker to pay the difference on price moves. These instruments enable the use of leverage and entering both long and short positions.
- Leverage: Leverage refers to the ability to place an amount of money as collateral with a broker and gain exposure to the markets which is greater in size than the initial deposit.
- Short selling: Short selling is a trading strategy where you make a profit if an asset’s value decreases, and a loss if its price rises.
- Stop-loss orders: A stop-loss is an instruction to automatically close your position if it loses more than a certain percentage or amount.
- Position management: Tools such as stop-losses can be used by traders and investors as part of risk management, but investors adopting a buy-and-hold approach typically wait for positions to become profitable again.
Tip: Leverage potentially increases the scale of returns but also magnifies losses by the same multiplier.
Time commitment and monitoring
The time investment required differs dramatically between the trading and investing approaches. When it comes to trading, it is imperative to note that you will most likely need more time to manage your account.
Trading time requirements:
- Daily market analysis and preparation
- Real-time position monitoring
- Continuous education on market dynamics
- Regular strategy refinement
Investing time requirements:
- Initial research and due diligence
- Periodic portfolio reviews
- Occasional rebalancing
- Annual tax planning
Case Study – Investing vs Trading
Consider an investor and a trader both interested in First Solar Inc (FSLR) shares, currently trading at $190. While the target market for both approaches is the same, the key differences between the two approaches will result in very different outcomes.
The Investor’s Approach:
- Purchases 10 shares for $1,900
- Holds for 3 years
- Benefits from $320 in dividends
- Sells at $205 per share
- Total return: $470 (24.7%) over 3 years
- Costs: Two transactions (buy and sell)
The Trader’s Approach:
- Makes 20 trades over 3 months
- Average position: $2,000 using CFDs
- Strategy aim is to capture multiple 2% moves with stop loss 2% below trade entry point.
- 12 winning trades, 8 losing trades
- Cash return on winning trades = $482
- Losses on losing trades = $320
- Total gross return: $160 (8%) over 3 months
- Costs: 40 transactions plus overnight financing fees
These examples are simplified and for illustrative purposes only; actual liability depends on personal circumstances and local laws.
This example illustrates how different time horizons and approaches can lead to different outcomes. Note that costs will significantly impact the trader’s returns despite the shorter timeframe.
Final Thoughts
Trading and investing have many similarities, and explaining the differences can be done by considering the commonly used phrase: trading involves “timing the market,” whereas investing is all about “time in the market.”
However, these approaches exist on a spectrum rather than as rigid categories and many market participants combine elements of both approaches. That could involve maintaining a core long-term investment portfolio while allocating a smaller portion to shorter-term trading opportunities.
The key is understanding your own goals, risk tolerance, and available time commitment. Remember that neither approach guarantees profits, and both carry risks. Proficiency in either requires education, discipline, and a clear strategy aligned with your financial objectives.
Visit the eToro Academy to learn more about different ways to gain exposure to the financial markets.
Quiz
FAQ
- What is the difference between investing and saving?
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Investing involves putting some of your capital into assets traded in the financial markets. When you start investing, the value of these assets may or may not increase in value. On the other hand, saving offers more certainty regarding returns. For example, putting money into a bank savings account with a fixed rate of interest will guarantee a pre-agreed percentage increase, but with no possibility of outperforming this interest rate.
- How are investment returns taxed?
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Your personal circumstances will determine how much tax you pay on any investment returns. Authorities in many countries support long-term investing through the use of tax-efficient investment schemes while tax codes in some countries will apply higher rates of capital gains tax on assets held for a shorter period of time.
- Can someone be both an investor and a trader?
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Yes, many people adopt both approaches simultaneously. You might maintain a long-term investment portfolio for retirement or achieve financial independence, while simultaneously using a smaller portion of capital for short-term trading. The key is keeping these strategies separate and understanding the different skills and time commitments each requires.
- Is day trading the same as trading?
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Day trading is one specific type of trading where all positions are closed before the market closes each day. Trading encompasses various timeframes, including swing trading (days to weeks) and position trading (weeks to months). Each style requires different short-term strategies and time commitments.
- Do investors ever use stop-loss orders?
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While more common among traders, some investors do use stop-loss orders, particularly during volatile market conditions or to protect unrealised profits on successful positions. Whether you use a stop-loss or not will depend on your overall financial aims, the nature of the strategy you are applying, and your tolerance of risk.
The benefit of stop-losses is that they can limit further losses being made on bad positions, but by closing out positions they do remove the chance of the strategy coming good in the long-term.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research.
Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. The availability of all the above-mentioned products and services may vary by jurisdiction and country.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.