For anyone who participates in buying and selling stocks, making a profit is the ultimate goal. However, two main types of stock market participants—traders and investors—follow different strategies in pursuit of that goal. The most significant difference comes down to timing: investors seek to build wealth by holding a portfolio over years or even decades, while traders employ short-term strategies designed to maximize returns on a daily, monthly, or quarterly basis. Each approach carries potential benefits and risks, and choosing whether trading, investing, or a combination of both is right for you will depend on your own interests, abilities, and tolerance for risk.
What is trading?
Over a period of several years, the stock market tends to deliver an average return of approximately seven percent. Traders strive to outperform this average by purchasing stocks, commodities, and other types of easily liquidated securities, holding them for relatively short periods of time, and selling them with the goal of yielding a profit based on market fluctuations.
Generally, traders seek returns through the “buy low, sell high” approach—but they may also use other strategies, such as short selling stocks. Short selling is a risky technique that involves borrowing shares, quickly selling them with the expectation that they will decline in value, buying them back at the lower price, and returning the shares to the lender while pocketing the difference. In making decisions about which stocks to buy and sell, traders tend to focus on a stock’s technical factors and short-term price fluctuations, rather than a company’s expected long-term profitability or broader shifts in the economy.
Traders can be grouped into the following four categories based on how long they generally hold stocks and other instruments:
- Scalp traders seek to profit from small price fluctuations, holding investments for mere minutes or even seconds.
- Day traders buy and sell investments within a single trading day.
- Swing traders try to capture short- to medium-term gains by holding investments for periods ranging from a few days to several weeks.
- Position traders hold investments for longer periods of time than the above categories, though not for as long as buy-and-hold investors. With a focus on evolving trends that will cause investments to appreciate in value, position traders hold investments for months or even years.
While trading can yield above-market returns in a short period of time, it also carries a significant risk of loss due to market volatility and the difficulty of predicting the trajectory of individual stocks. Mitigating this risk requires a substantial investment of time spent researching stocks and companies and managing your portfolio—particularly if you practice scalp or day trading. However, if you have the time and skill and are comfortable with the risks involved, trading can be an exciting and profitable tool in your overall financial strategy.
What is investing?
In contrast to the short-term strategies used by traders, investors seek to gradually build wealth over the course of several years. If you have a 401(k) or an IRA, you are an investor, as these accounts are designed to grow over an extended period of time—often multiple decades—with the goal of creating a nest egg for retirement.
An investor’s portfolio may include stocks, baskets of stocks, bonds, mutual funds, and other instruments, which are held without regard to the short-term fluctuations of the market. While investors’ portfolios may decline in value in a given year, their strategy is based on the fact that historically, the market has an upward trajectory over time. Therefore, by riding out the market’s ups and downs—rather than reacting to company news or economic trends, like traders do—investors expect to gain a steady return in the long run. While holding onto their portfolios, investors can increase their gains through compounding interest, dividends, and stock splits that occur along the way.
One of the keys to a successful investing strategy is to ensure that your portfolio is diversified, meaning that it contains different asset classes, industries, and geographies. This will help reduce volatility and balance risk and reward. In addition, investing requires patience, a willingness to avoid reacting to market fluctuations, and the understanding that you may not experience significant growth in your portfolio for many years.
As you strive to build wealth through a strategy that includes trading, investing, or both, working with an experienced financial professional can help you reduce risk and maximize your gains. Contact our team today to schedule a consultation!
–Stephanie Vance, J.D.
We are Arbor Wealth Management, a Phoenix-based firm that offers comprehensive financial planning services. We’re partners in your financial future. Like a conductor coordinating a beautiful symphony, we’re intimately involved in your financial future. We take the time to know how each instrument in your personal orchestra is performing, keeping all aspects of your plan in tune. We accomplish this by making sure your finances remain pliable, whether you are in an accumulation or distribution stage in life.