What Is the Difference Between Buying & Trading Stocks?

Buyers and traders of stocks have the same goal: make money.

Buyers and traders of stocks have the same goal in mind: make a profit. The biggest difference between the two is that the buyer has a long-term horizon, while the trader takes a short-term view.

Stock Buyers

Buyers of stocks usually hope to gain profits over the long term.

People who buy stocks usually intend to hold them for the long term. They buy shares because they think the price of the stock is going to rise. The company also might pay dividends, which is the company's way of sharing profits with their shareholders. Dividends are often quarterly cash distributions.

Stock Traders

Stock traders hope to make fast profits.

Stock traders buy and sell stocks within a short time, sometimes within the same day. Their investments are considered speculative. Traders hope to sell the stock at a higher price than they bought it and make a quick profit. They often base their trades on small intraday changes in the price of a stock.

Dangers of Stock Trading

Trading stocks is risky, and you might lose money.

Stock trading can be costly. The stock you buy to sell the same day might start dropping in price as soon as you buy it and continue to drop. If you need the money, you might have to sell at a loss.

Consider Effect of Broker Commissions on Trading

Stock brokers charge a commission every time you buy or sell a stock. If you are a stock trader and you are buying and selling often, your profits can be eaten up by commissions.

Tax Considerations

Commissions paid on stock trades eat into your profits.

Gains on stock you hold for a year or less are taxed at a higher rate than gains on stock you hold for longer than a year.

References

• Taxes on short and long-term capital gains