What is the difference between investing & trading in the stock market? I think these two terms often get mixed up and though there can be some overlap there are definitely some core fundamental differences. I’ve spent a lot of time doing both and here are some of the main differences in my opinion:
Time frame
Investing is intended to be over a much longer time than trading. In terms of stocks I would think of investing as a holding period of 3+ years at the very least and in some cases never selling. The goal being to be a partial owner of the company and benefit from the long term appreciation of the business. Less time than this and you aren’t seeing any development within the fundamentals of the business.
Trading is over much shorter time frames, ranging from literally seconds up to weeks or months. The goal being to profit from short term fluctuations in the price and cut losses quickly if anything goes wrong.
Objective & strategies
Investing is for long term wealth accumulation and the generation of passive income via dividends or interest payments. You can be fairly hands off with investing if you want to be, though equally people can dedicate their entire careers. The main investments include buying and holding stocks, bonds & funds. You could wait and try to the time the market to buy stocks at good valuations, though a common strategy is to average in to your chosen stock. For example if you had £1,000 to invest, you would invest £200 on a set day each month over the next 5 months, or once every two months for 10 months. The idea being you won’t buy at the worst or best price and will limit mistakes.
Trading is for profits in a short space of time. Trying to time the markets and ideally generate profits on the small fluctuations in price movement within longer term trends. This requires a lot of time investment, especially for day trading, as you need to be at the screen monitoring your trades. Main strategies include day trading, swing trading & shorting stocks. All of which involve technical analysis through chart reading. Any time frame within a single day is often called day trading. While longer time frames such as days or weeks are called swing trading.
Costs
There are usually only small costs associated with investing as you are not making that many transactions. You’ll normally be charged a dealing fee when you purchase a stock, though as you’re holding for a long time there’s then nothing. The exception to this is if investing in funds, where there will be a management fee, usually less than 1% per year. Though again not a huge cost.
On the other hand traders can face quite high costs due to the sheer number of transactions they are making. Sometimes day traders are making dozens, or even hundreds per day. Each of these has a fee associated with it, so they need to be taken into account within trading strategies.
Tax considerations
There are some fantastic options when it comes to investing in the UK. You can get a stocks & shares ISA which allows you to deposit up to £20k per year, which can then be used to invest in stocks. The purpose of the ISA is that when you sell those stocks you don’t pay any tax on your gains! So start as early as possible in life and build up a pot. If not in a tax wrapper you will have to pay capital gains tax when you sell a stock on any profits you make and on dividends, depending on what country you’re in. In the UK capital gains rate is currently set at 20%.
Trading can incur higher taxes depending on how you’re doing it. In a normal dealing account you will have to pay capital gains on all profits, which can pile up. Though in the UK you can trade in a Spread Betting account, which as I understand it has no tax implications with it as it’s considered gambling, due to the fact you’re betting on the price movement, not actually buying the stock.
Conclusion
If you’ve not tried either before I would suggest spending a bit of time with both to see what suits your personality. Both can be profitable, but investing definitely has a higher percentage success rate. With trading especially I would recommend starting with a training account where you can practice without real money on the line. I did this for a while and it helped eliminate some stupid mistakes that would have cost me real money. Good luck!