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Stock Trading vs. Stock Investing: What’s the Difference?

February 23, 2022 by Daniels Trading| Tips & Strategies

When it comes to making money in the world’s equities markets, there are two strategies: stock trading and stock investing. Each has a unique functionality and a distinct collection of pros and cons.

Read on to learn more about the stock trading vs. investing dichotomy and which may be best suited for your financial objectives.

Stock Trading vs. Investing: Form & Function

One common misconception in the world of finance is that trading and investing are equal. False! Trading and investing are very different disciplines. Two ways in which they differ are time horizon and risk exposure.

Horizon

A trade or investment’s horizon refers to how long a position is held in the market. In the case of a trade, durations are measured in seconds, minutes, days, and weeks. The compressed horizon is acceptable because the trader’s strategy is to execute a greater number of trades to ensure profitability.

Investments, in contrast, have horizons of months, years, and decades. The longer durations are necessary to achieve the capital appreciation outlined by the strategy.

Risk

The topic of risk in the stock trading vs. investing argument is complex. Ultimately, a case can be made that either is inherently riskier—just in a different fashion.

Many market participants view trading as being less risky than investing. This is due to two factors:

  • Capital allocations: Typically, a trade requires far less capital to execute than an investment, so the actual drawdown or money lost on an unsuccessful trade is reduced.
  • Time horizon: Active traders are “in the market” far less than investors. Thus, they have minimal exposure to systemic risk, black swans, or market meltdowns.

In contrast, it may be argued that long-term stock investing is a far safer proposition than short-term trading. This is due to the following:

  • Higher success rate: For long-term U.S. equities investments, there is a high expectation of success. Three reasons for this are growth-based valuation models, consistent U.S. economic expansion, and prolonged currency inflation. According to practitioners of “buy-and-hold” equities investment strategies, the risks of stock trading are far greater.
  • Less “noise”: “Noise” occurs when short-term price action becomes disjointed. For stock traders, noise can bring about significant loss and undermine performance. Long-term investment strategies avoid the negative impact of noise by focusing on catching larger trends.

Pros & Cons

Ultimately, the answer to stock trading versus investing hinges on personal preference. Let’s take a look at a few of the pros and cons of each strategy.

Stock Trading

The rise of zero-commission brokerages and app-based trading has led to a spike in the popularity of stock trading. From a fundamental standpoint, the practice has a few palpable pros and cons:

  • Pros: Stock trading is relatively inexpensive, can be done remotely, and offers a vast array of trading alternatives. With around 6,000 stocks listed on U.S. exchanges, equities traders are never without options.
  • Cons: The short time frames of stock trading make successfully executing a high volume of trades an ongoing challenge. Also, active trading requires significant time investment, can be an exhausting endeavor, and subjects participants to the pattern day trader rule.

Investing

It is estimated that more than half of all American households own stocks in some form. Many of these families hold investment vehicles such as 401(k)s or mutual funds. Here are the key upsides and downsides of stock ownership:

  • Pros: Investment offers portfolio diversification, appreciates wealth, and provides various tax advantages. Also, investing reduces the negative impact of noisy price action or short-term pullbacks in the market.
  • Cons: Long-term investing ties up capital, poses opportunity costs, and increases the exposure to systematic risk.

Interested in Getting Started with Stocks?

The stock trading versus investing question is a big one because neither approach is suitable for everyone. At the end of the day, you’ll need to conduct your due diligence and decide whether the pros outweigh the cons.

A great place to begin your journey into any market is the StoneX ebook Basic Training for Futures Traders. Featuring input from more than 1,000 traders, Basic Training is an excellent market primer for any aspiring participant. Don’t wait—sign up for your free copy today!

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Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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