Time...
Though drawing a fine line between trading and investing may be difficult, we suggest differences related to time, need for income or wealth, and risk. While investing is often associated with long-term time frames, trading is usually considered a short-term strategy. However, views can differ of what is short or long term. Though day trading specifically refers to the purchase and sale of a stock in the same day, it is often used to describe any short-term trading. Short-term horizons can range from seconds to months. For tax purposes, one year is long-term, though it is common for five or ten years to be recommended for stock market investing.

Reason
As long- or short-term can be subjective, the goal of either income or wealth may be another way to distinguish trading from investing. The active, frequent buying and selling involved in trading is often done to generate recurring gains that can be spent as income. Long-term investors with a more passive approach may have decades-long holding periods, allowing their wealth to grow over time for future use. Economic setbacks are inevitable and can never be predicted with consistent accuracy. Investing for near-term time horizons with money that might be needed soon may bring the risk of markets not cooperating with your timeline. A long-term approach may allow time for portfolio holdings to recover from any market downturns.

Risk 
Trading is typically considered more of a speculative approach than investing. All investment involves risk, though speculative trading can be similar to gambling. In a previous edition (click for link), we suggested one difference between investing and betting may be having a clear idea of what a company is worth. Though it is possible for a trader to have a clearly formed estimate of what an asset is worth, some traders may only react to price movements, using little or no information about the actual corporation.

Single or Broad...
Trading often involves either stock picking or market timing strategies. Such strategies can expose traders to the non-market risk of single stocks, as well as the chance of inaccurately timing market moves. It is extremely difficult, even for professional traders, to consistently pick stocks or time transactions that will outperform an overall market over time. As the average working individual may invest to grow wealth instead of generating income, retirement is often the primary goal. For the average retirement investor, avoiding the non-market risk of single stocks through a broad-market portfolio can be a good choice for long-term investing.

August 18, 2021