What Is the Difference Between Buying & Trading Stocks?
Buying stocks and trading stocks are two very different approaches to participating in the stock markets. At the simplest level, investors buy for the long-term, while traders usually buy and sell quickly to pick up short-term profits. Although investors and traders use very different tools, the two sides often steal ideas from each other to improve stock market profits.
Buying shares of a stock for the long term is an investment in the company behind the shares. Investors look at factors such as the type of business, its sales and profit growth, its management team, and its dividend payments. An investor buys shares of a company with the expectation of owning the shares for a long time -- potentially many years. Shares are only sold if the company fails to meet an investor's expectations for sales and profits, or if another stock is found with better investment potential. Investing in stocks involves investment sub-disciplines such as value investing, growth stock investing and dividend stock investing.
Investing Pros and Cons
Historically, stocks have been the best investment asset class to own in terms of long-term gains. These gains can come from a combination of share price increases and dividends earned. A portfolio of stocks does not require a lot of day-to-day management. The biggest downside of owning stocks for the long-term are those periods when the stock markets as a whole go down, called bear markets. Owning stock investments through a bear market can result in a significant loss of wealth and it can take several years to recover those losses. Investors who buy stocks for the long-term must put up with the psychological distress of watching investment values drop during periods of stock market turbulence.
Trading stocks is primarily about share prices. A trader does not spend much, if any, time looking at a company's business. Instead, she wants to find stocks with share price patterns that can be used to predict where the price will go in the near future. Traders use "technical analysis" tools to analyze factors such as price trends and trading volume. A day trader might hold a stock position for less than a day while a swing trader might hold it for several days or even a few months, depending on the trading strategy employed.
Trading Pros and Cons
Stock trading provides fast action and the potential for significant profits in a short period of time. The range of strategies allows a trader to make money in both up and down markets. It is possible for a skilled trader to trade full-time and live off his profits from trading. However, successful trading is significantly more difficult than buying stocks for the long run. Traders usually use leverage to increase profits, but the same leverage can quickly wipe out an unsuccessful trader's money. On its website, the Securities and Exchange Commission notes that most new traders lose the bulk of their money during the first few months of trading and most do not reach the level of being a profitable trader.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.