Investing vs. Trading

What is the difference between investing and trading?

Both trading and investing, after all, are at the most simple of levels, application of capital in the pursuit of profits.

If I buy XYZ stock, I expect to either see the price appreciate or earn dividends, or perhaps both. What separates trading from investing, however, is that generally in trading one has an exit expectation. This might be in the form of a price target or in terms of how long the position will be held. Either way, the trade is seen to have a finite life. Investing, on the other hand, is more open-ended. An investor will buy a company stock with no predefined notion of when he or she will sell, if ever.

As noted earlier, for many people trading and investing seem like the same thing. The mechanics of buying and selling are basically the same. Sometimes the analysis done to make those decisions is identical as well. It is the intention and definition of objectives which separate trading and investing, though.


It has to do with the manner in which the applied capital is expected to produce a return. In trading, the appreciation of capital is the objective. You buy XYZ stock at 10 expecting it to go to 15 and thereby produce a capital gain. If dividends or interest are paid out along the way, that is fine, but likely only a minor contribution to the expected profits.

In contrast, investing looks more toward income over time. That makes income production, such as dividends and bond interest payments, the major focal point. Do investors experience capital appreciation? Sure, but unlike in trading, that is not the prime motivation.

With these definitions in mind, consider what many people refer to as their single biggest investment, their home. Based our second definition of investing, however, a home is generally not an investment because in most cases, it does not produce any income. In fact, it produces considerable expenses in the form of mortgage interest payments, utility bills, and maintenance bills. If anything, a home is a trade. We buy it and hope for its value to rise over time, increasing our equity. And the fact that many people expect to move in only a few years and sell at that point makes it even more of a trade rather than an investment. Of course owning rental property can certainly be viewed as investing, unless one is flipping it, which would definitely be trading.