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Understanding the different terms used in the financial markets is key to developing the skills needed to achieve your financial goals.

Something that should be clarified right from the start is the difference between investing and trading. 

Discover what investing and trading are, as well as some of the crucial differences between the two, to help you decide which might be the better fit for you.

What is Investing?

Investing involves buying assets with the aim of making a long-term financial return.  The length of this process will depend on your individual circumstances . Some people invest to achieve financial independence and retire early, whereas others invest to fund education or celebrations, such as weddings. Regardless of the aim, investing usually involves following a strategy with an  investment time horizon of at least a year.

Investors will usually choose assets that they expect to increase in value by the time they are ready to convert their investment back into cash. There are no definitive rules about which assets should go into an investment portfolio, and diversifying your portfolio across different  asset classes  is an option that many experienced investors choose.

The assets themselves are not the factor that distinguishes investing from trading. Instead, the major difference is the length of time for which you hold them.

What Is Trading?

Trading involves buying and selling securities  within small time frames, usually ranging from seconds to weeks.  Trading is more speculative  than investing and involves the implementation of short-term strategies.

Traders tend to focus on which direction an asset’s price is likely to move, rather than the reason behind it.  These moves might be driven by shock news events or other momentary pricing anomalies, which can be explained by  technical analysis.

Trading requires active management of positions and the monitoring of news feeds.  Traders are also likely to use  risk management  techniques, such as  stop-loss orders, to automatically close out losing trades, rather than waiting for them to become profitable again.

What Are the Key Differences Between Investing and Trading?

The major difference between investing and trading is the length of time for which a position might typically be held . Investing can involve strategies with much longer time horizons, whereas traders aim to make profits from short-term price moves.

Final Thoughts

Trading and investing have many similarities, and explaining the difference is best done with a commonly used phrase in the finance industry:  trading involves “timing the market,” whereas investing is all about “time in the market.”

STOCK TRADING AND INVESTING FOR BEGINNERS

Investing in stocks is one of the most popular ways for people to try and achieve  financial independence . Stock trading and investing can be daunting for beginners, but this guide will help new traders understand exactly what stocks are and how to pick the right ones.

How to invest in stocks:

Stock trading for beginners involves considering your overall investment aims and your  reasons for investing .  Your risk-profile  will dictate which types of stock you should hold, taking into account the inevitable fluctuation of market prices.

Some investors buy stocks to gain broad exposure to the financial markets. If this is the case,  blue-chip  stocks or stock  ETFs  offer lower risk-return . Alternatively, spend time trying to discover  growth stocks  that might outperform the market. 

It’s generally recommended to  diversify your portfolio , and so some investors choose to follow both approaches and  build a collection of stock positions that complement each other, smooth out returns and mitigate against  risk.

Historically, the stock market is well-known for making long-term gains. Since 2000, there have been four  bear markets . These have shaken some investors out of the market, but those that held on to positions in the   S&P 500  Index, for example, would have made potential gains of 145%.

How does stock trading work?

Stock trading works by speculating on short-term spikes in stock prices. Whereas some stocks, such as  dividends , suit investors looking for a low-maintenance, buy-and-hold  approach, those interested in trading stocks more actively will need to commit additional  time and resources to the process.

Regardless of the approach, having a clearly thought-out plan will help you to stay on course, and  there are a number of different strategies available to help support every type of investor or trader .

How to Profit from Stocks ?

There are three main ways that stock price moves can result in a trading profit. 

Capital Gains	If you buy a stock and its price goes up, when you sell it, the cash proceeds will be greater than the amount you paid to enter into the trade.
Dividend Income	Some stocks pay dividends to shareholders. This involves a company distributing a share of its profits to its owners.
Short Selling	Contracts for Difference (CFDs)  allow traders to short sell a stock that they think is overpriced. If the price subsequently falls, they can buy it back at a lower price and make a profit.

Final thoughts

As with all assets, there is a risk that the stocks you invest in might experience a fall in value, but they are still an  excellent option for many beginner investors .