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.

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.

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

Markets Demystified is published the first and second Wednesdays of each month,
and is meant to help readers understand how stock market investing relates to household and personal finance.

Thanks for Reading!

Jonathon Oden
Owner | Aesop Advisor LLC

Aesop Advisor LLC newsletters are for informational purposes only. They do not attempt to predict future stock market moves and are not intended as individual investment advice. Aesop newsletters are not recommendations to buy, sell or hold any asset and are not intended as actionable investment advice or market timing. Equities references generally refer to the overall stock market, though if individual companies are mentioned, it is not a recommendation to buy, sell, or hold shares of the company. Unless otherwise indicated, terms including "stocks", the "stock market", and "market(s)" refer to Standard & Poor's 500 index. All investments involve risk and the past performance of a security or financial product does not guarantee future results or returns. While diversification may help spread risk, it does not assure a profit or protect against loss. There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing. The price of a given security may increase or decrease based on market conditions and customers may lose money, including their original investment.