Trading versus Investing: Is there really a difference?

Blog | imported-posts

Is there a clear distinction between an investor and a trader?

If you look it up on Google, the distinction seems to generally be quite vague. Investors, we are told, look to "buy and hold", while traders are considered to buy/sell or sell/buy within the same day (usually). But even then, we are told that traders can buy/sell over a span of multiple days.

So then, the question arises: is there some sort of a magical cutoff period, after which a trade turns into an investment? Does a trade qualify as an investment if it lasts for more than a month?

Is there really any substantial, qualitative difference between the two?

Finding value in the asset

There are different theories on this, but the more you try to find a definitive "difference" between investing and trading, there seems to be one criteria that differentiates a trade versus an investment.

An investor looks to buy and hold because he sees value in the actual asset. A trader, on the other hand, is looking for a directional move (up or down), regardless of whether he finds the asset overvalued or undervalued.

So, first and foremost, a clear difference is that investors first buy an asset, and then sell at some point in the future. A trader, on the other hand, can sell first and then buy.

But more fundamentally, an investor believes that the actual asset's value will appreciate in the future. An analogy is a real estate investor. He buys property because he believes that, over time, the property itself will appreciate in value. A speculator/trader, on the other hand, might look to buy and sell because there is an overall trend in real estate prices rising in the area. He might not have any belief in the actual value of the property. He merely looks to "flip" the property when prices move quickly up and down.

And yet, even then, it becomes a little murky on what differentiates an investor and trader.

The final answer might just be that there is no black and white, dictionary  answer to the question 🙂