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Trading and investing both involve seeking profit in the stock market, but they pursue that goal in different ways.
The main difference between trading and investing is that traders jump in and out of stocks within weeks, days, even minutes, with the aim of short-term profits; investors have a longer-term outlook. They think in terms of years and often hold stocks through market volatility.
The focus of traders and investors is also different. Traders often focus on a stock’s technical factors rather than a company’s long-term prospects. What matters to traders is which direction the stock will move next and how the trader can profit from that move.
Investors study a company’s potential for long-term growth or value, then buy and hold, but traders often take advantage of small mispricings in the market, such as when political uncertainty in a foreign country temporarily pushes down the share price of a U.S. manufacturer.
So-called scalp traders might be in a position for just minutes. Day traders are focused on the trading day, while swing traders invest for days or weeks.
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If you're interested in trading, here are some things to consider to minimize your risk:
Create a plan that dictates when you’ll buy and sell. For example, you might decide to sell if a stock rises or falls a certain percentage.
Stick to your plan. Even experienced traders let their reasoning for holding certain stocks shift.
Figure out how much money you can afford to lose, and don't trade more than that.
Go in with open eyes. The stock market's long-term average return is 10%, and studies have shown that it's extremely difficult for even professional traders to beat the market.
Know your taxes. You might be able to take a tax deduction for trading costs, but you might also owe taxes. Rates on short-term gains range from 10% to 37%. Learn more about short- and long-term capital gains.
Investing is a way to build long-term wealth. Remember that 10% average stock market return? Sometimes it's lower, sometimes it's much higher, but you have to stay invested to reap the rewards.
Here are some things to consider:
Create an investment plan for buying, selling and rebalancing your holdings. For example, some people sell some holdings and buy others to get the portfolio back in line with original goals after market moves have pushed it out of whack.
Consider index funds, which don't try to beat the market, but mirror the performance of a market index, such as the Nasdaq or the Standard & Poor’s 500.
Know your investing strategy. That includes knowing what your goals are (retirement, college tuition, etc.) and how much risk you can tolerate.
Be prepared for the long haul. You’ll need patience and discipline to stick through the market’s ups and downs.
» Ready to get started? Read How to Start Investing: A Guide for Beginners