There is one main question asked by those who are new to the financial markets, and even debated by experienced participants. The question being how you differentiate between trading and investing. The two are very similar.

Scope definition is the only difference. They are both very simple ways to gain capital. If I buy a stock, I expect either to see the price increase, or to earn dividends. In trading someone expects to exit. This might be in the form of price targeting or in terms of length of time the position will be held. The trade seems to always have a finite life. Investing leaves for open endings. An investor will buy a company’s stock and may never plan to sell.

Here is an example. Let’s pretend Warren Buffet is our investor. He buys a company that is undervalued, and holds on to his positions until he stops liking their prospects. He doesn’t think in terms of a price to exit the stock. Think of George Soros, the trader. His famous trade was shorting the British Pound when he though the currency was overvalued and ready to be withdrawn. His position was based on circumstance. The Pound was devalued in market and Soros exited with a good profit. This was a trade, rather than an investment, because he had a predefined exit.

Trading can also be defined as another way. The manner that a capital is expected to produce a return has to do with it. In trading, the appreciation of capital is the objective. You buy a stock at 10 and expect it to go to 15, expecting it to go through a capital gain. If dividends or interest are paid out along the way, that’s fine, but only a small contribution to the profits expected.

Investing, however, looks more toward income over time. Dividends and bond interest payments are a major focal point. Investors can experience capital appreciation? Yes, but unlike in trading, that isn’t their prime motivation.

With this in mind, think about what many people consider their single biggest investment, their home. Based on the second definition of investing, however, a home isn’t really an investment at all because it doesn’t produce income. If anything, it produces many expenses. In fact, a home is a trade. We buy it and hope it’s value will appreciate. People generally move in for a few years, then sell, which makes it more like a trade. Unless you own rental property, which is an investment.
 The confusion between trading and investing is easily had. The semantics of buying and selling are much in the same. The decisions are identical as well when it comes to the analysis one does. Definition is what separates trading and investing.

About the author: Michelle Walton writes as a hobby and maintains websites for St Louis featuring Yoga St Louis.