Trading vs. Investing: Understanding the differences
We take a deep dive into trading and investing, their differences and similarities and then help you choose the path that works best for you.
Updated 
10 min. read
Are you ready to jump into the financial markets but aren’t sure where – or how – to start? The countless terms - from investing and day trading, to buy and hold and dividend investing – can spark confusion and anxiety. And then there’s the most basic of head-scratchers: what’s the difference between investing and trading?
It really can feel overwhelming. But this article will help you feel more confident before jumping in. We’ll first look at trading – what it is, what it’s not, how it works and its challenges. Next, we’ll explore investing and its features, demonstrating how it differs from trading in strategy and effect. Finally, we’ll examine which approach may work best for you taking into consideration your needs, goals and financial acumen.
What is Trading?
When we talk about trading, we’re referring to the frequent buying and selling of financial assets, such as stocks, currencies and commodities. The goal is to profit from the returns generated when buying at a lower price and selling at a high price within a short period of time. Traders adopt short-term strategies to maximize their returns daily, monthly, or quarterly.
As we’ll see in greater detail below, trading differs from investing in the frequency of its transactions, short holding periods and fast-paced nature. Before doing anything, traders are constantly monitoring the markets for any, and all, changes in asset prices. Their objective is to take advantage of the up-and-down fluctuations in order to maximize profits and minimize losses. A trader's time horizon can be anywhere from a few minutes to several days.
If done right, trading offers real potential to make significant profits. On the downside, however, it also represents substantial risk in case of market volatility. Therefore anyone looking to venture into trading should be diligent, well-prepared and comfortable taking risks.
What are trading styles and categories?
Trading styles can differ depending on the timeframe or holding period in which a trading instrument is bought and sold. Before adopting a trading style, traders need to take into account their account size, the amount of time they have to dedicate, the extent of their trading experience and their tolerance for risk.
Style categories
Typically, there are four style categories:
Position Trader: Positions are held from months to years (a position is the amount of a particular security, commodity, or currency held or owned)
Swing Trader: Positions are held from days to weeks
Day Trader: Positions are held throughout the day only with no overnight positions
Scalp Trader: Positions are held for seconds to minutes with no overnight positions
What is Investing?
Investing is a long-term approach to build wealth gradually, over time. Investors buy and hold mutual funds, stocks, bonds, exchange-traded funds (ETFs), and other investment instruments for long periods, typically months, years, or even decades.
Even if markets fluctuate – as they tend to do - investors typically stick with their investments, riding the ups and downs, while remaining focused on their long-term goals. The expectation is that their assets or securities will gain (or re-gain) profit over time.
To achieve their goals, investors require patience and a good understanding for how the market works. They must also be okay with not seeing immediate returns, as their money often needs time to grow and recover from any dips. As we’ll explore in greater depth below, investing is clearly a lower risk adventure than is trading. It’s not hard to see why. For starters, long-term growth is less influenced by intense market fluctuations.
What are some Investment Styles?
There are two investment approaches that investors tend to follow:
Active Investing
Active investing refers to when an investor tracks the markets on a regular basis and makes any necessary changes. Active investors are known to search for investments that mimic or outperform the returns of a specific benchmark index.
Passive Investing
Passive investors don’t monitor the markets on a daily or regular basis. They adopt a buy-and-hold strategy with the goal of tracking the returns of the benchmark index.
Investment strategies to consider
The method one follows when investing money is called an investment strategy. There are several strategies available and the one you adopt will depend on a number of things like how much you’re investing, how long you plan on investing your money, and your investment “why” (what you are trying to achieve with your investment). For example, one strategy can help you achieve aggressive growth in the near future, while another may help you secure steady profit over a longer time horizon.
Some investment strategies include:
Value investing
When investors pick “value stocks”, or stocks that are trading for less than their book value, that’s referred to as value investing. These are typically stocks with a reliable track record. An investor buys the stock at its lower price, confident that the price will rise once the market corrects itself.
Growth investing
When someone invests in a company that shows potential for growth in the future, that’s called growth investing. An investor may look to financial statements, board structure and other indicators to determine if a company is poised to grow and make a profit.
Dividend investing
When a company turns a profit, it can distribute some of the money to its shareholders. These payments - known as dividends - can be paid regularly or as a lump sum. A dividend investment strategy involves buying stocks that will pay dividends. Which typically means investing in steady, established companies with a history of strong performance.
Comparing Trading and Investing
It’s common for people to confuse investing with trading. To be sure, they do share some similarities. For one thing, they both place a premium on research and analysis to ensure decisions are informed, strategies are well-founded, and risks are mitigated. They also share the ultimate goal of making a profit in the stock market. But the two are quite distinct in how they pursue that goal.
Some of the key differences include:
Time horizon
Investors typically operate with a longer time horizon (often more than a year) because they’re interested in long-term growth and generating returns over time. Alternatively, traders invest for the short-term. Trading is typically the immediate buying and selling of securities, with the primary goal of profiting from short-term price fluctuations. Fundamental to trading is the holding of assets for small timeframes – sometimes even a few minutes.
Focus
Investors are interested in studying a stock’s long-term growth potential. That’s because investors are focused on building wealth over time, often through dividends, interest, and long-term capital appreciation. Traders are more focused on monitoring market movements, trends, and technical analysis to execute on trades quickly. Trading is looking for short-term profits through market timing.
Risk
To be sure, there’s always a risk you will lose your money. But traders face a greater risk of loss. For one thing, they hold onto their assets for a shorter period, which requires quick decision-making. For another, they can more significantly feel the impact of market fluctuations. Traders are also more likely to hold diverse assets in their portfolios that can prove riskier than others. Investing tends to be more stable as it allows for a more measured and patient approach.
Frequency of activity
Traders are frequently buying and selling securities, sometimes on a day-to-day basis (day trading). Investors trade less frequently with longer timeframes between buying and selling.
Passive vs active
Certain investments (e.g., interest-bearing bonds) can provide an investor with a consistent stream of passive income. This is great if you’re looking for regular financial returns. Traders, on the other hand, must – by virtue of their goals – adopt a more active approach day-to-day (or hour-by-hour) to achieve their financial objectives.
| Investors | Traders |
|---|---|
| Longer time Horizon | Short-term buying and selling |
| Study stock's long-term potential | Technical analysis, trends, etc. |
| Less risk | Risky |
| Less frequent activity | Consistently buying and selling |
| Can be passive | Active approach |
Trading vs. Investing: Which one is right for you?
Now that you have a better understanding of trading vs investing, you can more easily determine which approach most aligns with your financial goals. But what are those goals exactly? And what other factors should you consider before jumping into one approach over the other?
Financial goals
Your first step should be determining your financial goals. As a new investor, this question is one of the most important ones you’ll ever ask. Are you looking to achieve short-term gains to support an important milestone? Or do you want to pursue long-term wealth accumulation for retirement or generational wealth? To be sure, your answers will be influenced by the time horizon and urgency of your financial goals. But speaking generally, if quick profits and immediate gains align with your objectives, trading is probably the right choice for you. If your goals are more aligned with stable, long-term growth, investing can prove the better option.
Liquidity
Next, ask yourself whether liquidity is important to your financial situation. Will you need those funds for a more immediate purchase? Or is urgency less a concern? Liquidity refers to the ease with which an asset or security can be converted into cash without affecting its market price. Keep in mind that funds will be “locked-in” for a long(er) period of time when investing. But, when trading, liquid funds will more likely be within reach due to the short-term trades common to the approach.
Risk Tolerance
When we speak of risk tolerance, we’re referring to your ability (and desire) to contend with the uncertainties and potential losses resulting from your financial activities. Of course, risk tolerance doesn’t exist in a vacuum. It’s influenced by things like your financial goals, time horizon, and emotional resilience. Trading often involves higher levels of risk. It also calls for a certain comfort level in the face of market volatility. If your stress level soars simply contemplating those realities, a calmer approach in the name of investing may be better suited to your level of risk tolerance. Investing demands more patience and a deliberate strategy toward long-term growth.
The good news is you’re not locked into one approach and can shift your approach as needed.
Time Commitment
Because of its short-term and high-risk nature, trading demands constant attention and quick decision-making. Trading also necessitates a more profound understanding of technical analysis and market trends. Active involvement is essential if you’re a trader (especially a day trader).
On the other hand, since investing is focused on long-term wealth generation, it allows for a more patient approach. That may be your preference. What’s more, if you enjoy a less hands-on approach, investing is certainly the way to go.
Remember to take the time to do your due diligence via research before pursuing one approach over the other. Leverage all the research and data available, and check out trading platforms, like InvestorLine, to ensure you make an informed decision as part of your trading or investing journey.
Final words on Trading vs. Investing
Now that you have a better understanding of trading and investing, the features they have in common, and the many ways their diverge, it’s time to take that leap into financial markets. Ask yourself what you want to achieve, the amount of time you can commit, and how much risk you’re comfortable taking.
Once you’ve selected the approach most suited to your circumstances, you can create open an account on with BMO’s easy-to-use online trading platform, BMO InvestorLine. If you’re looking for an investment platform that combines personalized advice and support, then BMO InvestorLine adviceDirect might be right for you. And be sure to check out the Investment payout calculator to help get your financial investment goals on track.
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