Trading vs Investing: Which Is Better For The Long Term?

Online brokerages now give you the same access to the markets as the pros, but how you use this access is up to you. You can become a trader or an investor, and some people combine both of those approaches.

Traders take a short-term approach, buying and selling at a fast pace for quick gains, while investors look at what a company can become years in the future. These branches of thought have dominated the stock market since its beginning, but which one is the better choice? It’s time to do a deep dive and find out the pros and cons of each choice.

What is Investing?

73% of Americans are planning to invest in 2023 and more than half of those investing plan to put away more in 2023 than they did last year. An investor focuses on a company’s fundamentals and what the company can become in a few years. Some investors look for stable blue-chip stocks, while others take more risk with positions in high-flying growth stocks. While some investors may incorporate technical analysis into their decisions, there are some who may place a strong emphasis on the fundamentals. 

How Investing Works

Investing is the process of buying assets today and holding onto them for several months or years. Investors look at a company’s balance sheet, valuation metrics and other details to get a better scope of the investment opportunity. Some investors also browse through a company’s earnings reports and listen to calls to gauge how management is responding to challenges and how they feel about the company’s future. These investors lean on patience and fundamental analysis to reach their financial goals.

Pros of Investing

Investing has several advantages. It takes less time to invest than to trade because you primarily monitor holdings after doing the upfront research. Investing also lets you capitalize on the power of compound interest. And you won’t incur as many fees as a long-term investor, since you’ll be making fewer trades. 

Long-term investing also allows for certain tax advantages. Long-term gains, or profits on stocks that are held longer than a year, are taxed at a significantly lower rate than short-term gains. In other words, traders that buy and sell stocks within the same year will face considerably higher capital gains taxes compared to long-term investors. 

Cons of Investing

Investors tie up their money in an asset for an extended period of time, and that same cash can’t go into any other position. Many investors stick with their picks for better or for worse, and they may stay on board for too long. Some investors play favorites and don’t walk away from their investments even when red flags are clear. You will have to wait for a stock to recover losses or yield respectable gains, and it can get emotionally draining.

What is Trading?

Trading is when you buy and sell stocks in short intervals to capitalize on price fluctuations. Traders look at a stock’s short-term potential. Bad fundamentals won’t scare away traders, as short-term trading opportunities can emerge.

How Trading Works

Trading is a fast-paced approach to making money on the stock market. Some traders exit all of their positions at the end of the day and reload the following day. You can stay in a trade for a few days, but most traders think in days and maybe one to two weeks instead of thinking in months and years like long-term investors. Traders establish entry and exit points to increase the likelihood of making profitable trades. People considering this path have several trading strategies to explore.

Position Trader

Most traders think in days and weeks, but some traders hold onto stocks for a few months or years before trading them. These traders are a hybrid of day traders and long-term investors. They focus on fundamental analysis instead of technical analysis, but they aren’t married to their stocks like long-term investors.

Swing Trader

Swing traders enter positions with the hopes of leaving at a profit within a day to a few weeks. These traders can wait out some of their losing positions without the attention required of a day trader.

Day Trader

Day traders lean into technical analysis for their decisions and often ignore the fundamentals. Where a company ends up in a few years doesn’t carry any weight for these traders’ decisions. Day traders can enter and exit positions within the same day and sometimes sell stocks a few seconds after buying them. 

Scalp Trader

Scalp traders make a flurry of trades, usually entering and exiting positions within minutes. These traders have clearly defined exit prices and have to stick to them because a single unprofitable scalp trade can offset many profitable trades. These traders believe in accumulating a string of smaller profits instead of going for one big trade.

Pros of Trading

Trading has several advantages over investing. Because your money isn’t tied up to an asset for a long period of time, you can quickly deploy it into another opportunity. Traders who liquidate before the market closes protect themselves from volatility after hours. You could get good returns from trading and capitalize on news items in real-time. Investors don’t take advantage of news items as often because long-term investors often use a passive approach with occasional monitoring.

Cons of Trading

Traders can get better returns than investors by timing the market, but it’s not easy. Even the most experienced traders don’t always get the timing right because of the unpredictability of the market. Traders also spend far more time in their portfolios than investors and have to contend with short-term capital gains tax rates on their profits, which can be as high as 37%. Traders can also become more emotional than investors as stock prices flirt near the entry and exit points.

For these reasons, the success rate of traders is significantly lower when compared to long-term investors. Studies suggest between 70% to 97% of day traders actually end up losing money. Contrast this with long-term traders, who are able to ride out various market highs and lows to take advantage of consistent gains.  

Similarities of Trading and Investing

Trading and investing both allow investors to capitalize on price movements in the stock market. Both approaches require stock analysis to make more prudent decisions. Investors and traders use entry and exit points to guide their actions.

Differences Between Trading and Investing

Trading is a greater time commitment than investing and provides quicker losses and gains. A trader who times the market well can outperform an investor, but they can also experience more potential risk. Trading can be riskier than investing but also has the potential to be more rewarding. Traders are actively reacting to the market on a day-to-day basis, while investors believe in a slow and steady approach. 

Is Being an Investor or a Trader Better for the Long Term?

You don’t have to choose. Some people excel as both traders and investors. They decide how much of their capital to allocate for long-term investments and use the rest for trading. 

Having the trader mentality from time to time can help an investor capitalize on news items that trigger significant short-term price fluctuations. This can result in earnings that may even allow you to potentially outpace the market. It’s best to give both approaches a try and allocate your funds accordingly.

Building a Portfolio That Aligns with Your Financial Goals

Investing and trading give you the opportunity to make your money work for you. While trading is a more hands-on approach, both choices let you grow your money and get closer to your retirement goals. 

Nevertheless, navigating the stock market can be challenging for any investor or trader, which is why it’s so important to have access to the most up-to-date knowledge and sophisticated investing tools. In this day and age, both traders and investors are turning to AI assistance to gain oversight into the most critical metrics that guide decision-making. 

AI investing assistance optimizes data and allows for a truly personalized investing approach. Whether you’re a trader or a long-term investor, knowing the ins and outs of the most important market moves is paramount. As you browse through different investment platforms, ensure that they have the technology you’ll need to build out your strategy.

Frequently Asked Questions

Q: How do you learn trading?
A: The best way to learn trading is to get started with a small amount of money. Watching, reading and listening to educational content about trading can help with the basics.
Q: Which trading strategy is most profitable?
A: Each trading strategy has its own strengths and weaknesses that revolve around market timing. Strategies aren’t profitable. People applying strategies with good timing makes them profitable.
Q: Which is more profitable trading or investing?
A: Trading can be more profitable if you time the market correctly, but investing has fewer risks.
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