What Is Meant by Stock Trading?

Investors own stocks for the long term and traders are looking for short term profits.
Investors own stocks for the long term and traders are looking for short term profits. (Image: chart background image by Stasys Eidiejus from Fotolia.com)

The act of buying or selling shares of stock through a broker is referred to as a trade. An investor buying stocks using his online brokerage account will use the trade screen to place the order. There is another definition of trading and this refers to how and when stocks are bought and sold.

Trading vs. Investing

Participants in the stock market can be broadly divided into traders and investors. Someone who is new to the stock market should understand the differences between investing and trading. The goals of the two approaches can be significantly different. A dedicated investor, not trader, may want to learn some trading techniques and use those skills to improve the timing of her stock purchases.

Time Frame

Traders have very different expectations on how long to hold a stock position compared to investors. Traders will buy shares and own the shares in a brokerage account for a few minutes to a few weeks. A trader has a price or time period in mind when the shares are purchased and the position is closed when the price or time limit is reached. Investors will own stock for months to years. An investor does not have a time limit in mind when shares are purchased. A stock position will be held for years if the stock keeps making money. A reason to sell for an investor is to buy another stock that has better prospects.

Fundamentals vs. Technicals

Investors evaluate and buy a stock based on the business potential of the company. Evaluating factors such as revenue and profit growth, dividend payouts and potential new products is called fundamental analysis. In contrast, traders use technical analysis to pick stocks to trade as well as entry and exit prices. Technical analysis uses the price action of the stock to find repeatable patterns or potential for a breakout. Traders do not care about the long term prospects of a company, they focus on the price movement of the stock and price charts.

Types of Trading

Traders can be again dividend into categories. Swing traders look for price trends and move into a stock holding for a few days or weeks. A swing trader may see a pattern that allows him to make several dollars or more per share if the pattern repeats. Day traders hold their stock positions for less than one trading day and a position may be open for only a few seconds. Day traders look at order flow and pick up quick moves in a stock price, making a few cents on every share, trading many shares a day. Traders use margin brokerage accounts that allow the leveraging of trading capital by borrowing a portion of the trading money from the broker.

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