If you are looking for ways to generate income, you might be thinking about stock trading or investing. To know which one is best for you, you might want to look at the difference between the two.
The focus and timing are the main differences
Stock traders aim for short-term gain. They buy and sell stocks within days or even minutes, with a focus on the share price. They are interested in the evolution of the stock and how they can profit from it.
Investors, on the other hand, have a long-term gain objective. They buy stocks and often keep them through the market’s ups and downs. They also reinvest dividends and profits into additional shares. Their focus is on a company’s potential for long-term growth.
Trading and investing have different approaches to protection
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Trading uses stop-loss orders. The idea is to close out at a pre-determined price before it goes down. Investing keeps positions during downtrends with the expectation of recovering the losses when prices go back up.
Different categories of traders
You can categorize traders by the length of time they hold onto their positions before selling them off. Scalp traders, for example, hold on to securities for only a few seconds. Day traders don’t keep positions overnight.
Swing traders can usually hold positions two to six days before selling. They use a more long-form approach to trading. Swing trading aims to identify a trend and find gains within it and can lead to substantial annual profits.
Trading or investing?
There are different things you can consider to decide which one is best for you.
- Profit goal. For a short-term return, trading is the way to go. If you have a long-term vision, investing is.
- Time. Investing requires a lot of patience and some research. But if you chose the right investments, you might get the chance to let the investment work for you. Trading is more time demanding. It requires hours to study charts and graphs, continually monitoring your returns.
- Taxes and fees. The capital gains tax is applied to any capital gain, and there are fees applicable for each trade. Trading involves much buying and selling, so more costs too. Long-term capital gains are taxed at a lower rate than short terms gains.
- Risk. In trading, the risk involved is higher than in investing. If the market drops in minutes before the trader had a chance to sell, he can find himself at loss. Long term investments, on the contrary, allow the investor to hold on to his positions until the market rebounds before selling.
Trading and investing can both bring returns or losses. Traders take advantage of the market conditions to buy or sell their positions on stocks over a short period and earn many but smaller profits. Investors buy and hold stocks with the objective of more significant returns over a more extended period. To decide which one is best for you, you should consider the one you are more comfortable doing.