Diversified funds, meanwhile, spread your money across hundreds of companies. This aims to smooth out any dips individual companies may experience by supplementing their returns with those of other companies. To determine whether investing or trading is best for them, an individual should consider their financial goals, risk tolerance, time horizon, and personal preferences.

Fidelity Smart Money℠

Investing is the practice of allocating money into assets with the expectation of long-term growth and income. Investors typically focus on fundamentals rather than short-term price swings. In practice, trading vs. investing isn’t an absolute dichotomy, as you can be an investor who occasionally trades, or a trader who also holds some long-term investments. The crucial thing is to understand the distinction so you can apply the right strategy at the right time. They often reinvest earnings and let the power of compounding increase their portfolio’s value. For that matter, many investors use a compound calculator to determine how much their account can grow.

Day Trading vs Investing – How to Decide

This means they likely will experience all of the ups and downs that the overall market experiences—and unlike traders, they won’t respond in real time to market events hoping to edge out market returns. Remember these are long-term results, and you shouldn’t invest money you may need to cover immediate expenses in an effort to beat inflation. The stock market experiences many peaks and valleys over months and years. If you invest money you need to cover near-term costs, you may have to sell at a greater loss than inflation alone would have cost you.

Do I need a lot of money to start?

If you want to try trading without worrying about losing your shirt, pick a broker that offers paper, aka virtual, trading. Andrea is a former NerdWallet authority on retirement and investing. Her stories have appeared in The Wall Street Journal, the SanFrancisco Chronicle, MarketWatch and elsewhere.

They focus on businesses with strong growth in earnings trajectories, expanding market share, and the latest, market-leading products or services. Options trading entails significant risk and is not appropriate for all investors. Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request. The information herein is general and educational in nature and should not be considered legal or tax advice.

Growth Investing

They may use various strategies, such as day trading, swing trading, or scalping, to profit from price movements. And while the broader stock market has recovered, not all company stocks have. Buying individual stocks, like many traders do, raises the risk that you could lose the money you invest.

Many people invest the majority of their money for the long term while trading a smaller portion for short-term opportunities. Dayana Yochim is a former Senior Writer/Editor at Reink Media Group who has written about personal finance and investing for more than 20 years. Her work has appeared in outlets including HerMoney.com, NerdWallet and the Motley Fool, and has been syndicated nationally. Dayana has also been a guest expert on “Today” and Good Morning America. Here are three questions to help you decide whether you’re a trader or an investor.

Technical vs. Fundamental Trading

Their strategies often hinge on analyzing technical patterns, market conditions, or even company fundamentals. In contrast, investors prioritize balancing risk and reward with minimal hands-on involvement. They typically achieve this by constructing diversified portfolios made up of low-cost index mutual funds or ETFs, intending to hold them for decades. While traders chase short-term profit opportunities, investors are in it for the long haul. Tax implications Almost anytime you earn best cloud stocks a profit, Uncle Sam wants his cut. The same is true with investing and trading, though investing may help you pay less in taxes.

What Are the Key Differences Between Investing and Trading?

While active investing seems like it would be the consistent winner, research shows that passive investing tends to win the majority of the time. A 2024 study from S&P 500 Dow Jones Indices shows that 93 percent of fund managers investing in large firms didn’t beat their benchmark index over the previous 20 years. And over time, only a handful could do so, with 92 percent of the professionals unable to beat the market over a 15-year period. These traders count on making a large number of small gains and prefer to work with highly liquid securities. A swing trader will try to analyze and identify when a trend is about to change and take positions to potentially profit from that change, or swing.

• This type of short-term trading requires constant attention, rapid decision-making, a range of risk management day trading techniques, and a high tolerance for risk.
• And that’s due to the many subtle costs and inefficiencies of trading.
• Professional traders often keep detailed journals tracking their trades to help them identify patterns and problems over time.
• Carolyn has more than 20 years of writing and editing experience at major media outlets including NerdWallet, the Los Angeles Times and the San Jose Mercury News.
• Please assess your financial circumstances and risk tolerance before trading on margin.
• Her team covers credit scores, credit reports, identity protection and ways to avoid, manage and eliminate debt.

Trading, on the other hand, can be exciting and potentially lucrative for those with the skill and discipline to do it well. There are traders who beat the odds and achieve market-beating returns, too. Traders provide liquidity and can profit from short-term inefficiencies, while investors provide capital to businesses and profit from long-term value creation. In sum, both trading and investing are viable ways to participate in the markets, but they serve different purposes and suit different folks. The line between short-term trading and long-term investing often comes down to holding period.

In contrast, investors focus on building a diversified portfolio designed to be held for years or even decades. They aim to ride out market volatility, staying invested to achieve long-term goals. This approach, often referred to as “buy and hold,” prioritizes matching the returns of a benchmark index rather than beating it.

• In sum, both trading and investing are viable ways to participate in the markets, but they serve different purposes and suit different folks.
• Investing can involve strategies with much longer time horizons, whereas traders aim to make profits from short-term price moves.
• Her personal finance articles have appeared in the Wall Street Journal, USA Today, MarketWatch, Forbes, and other publications, and she’s shared her expertise on CBS, NPR, “Marketplace,” and more.
• Investors, on the other hand, have a much longer view, often holding onto investments for decades without making frequent adjustments.
• They often reinvest earnings and let the power of compounding increase their portfolio’s value.

Insights from Fidelity Wealth Management

NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance. The length of the investment process will depend on your individual circumstances.