Are You a Stock Trader or a Stock Investor?

Trading and investing. Both sides of the same coin, right?

I wish it were that easy! Most people who own stocks ask themselves at some point, "Am I a trader, an investor, or both? And what's the difference?" I want to delve into some of the finer points of these two broad terms and allow you to choose which one fits you best.

Investing: putting your money in someone else's pocket and waiting

Let's start out by defining the terms. Investing refers to buying a stock with the hope of future gains, usually several years later. The word has its roots in the Latin "vestis," and directly relates to the idea of placing money in someone's pocket in anticipation of getting a return for the loan. The idea of having your capital or wealth working for you without any additional effort on your part comes from this classic meaning.

Investing is normally a passive activity after the initial purchase of the stock or fund.

Trading: putting your money in a bunch of pockets, and maybe a few roulette machines too

Trading, on the other hand, is an active pursuit - sometimes very active.

Trading is the buying and selling of stocks or other financial assets with the hope of making gains in a relatively short period of time. In many financial markets, you can not only buy assets that you believe will go up in value, but you can also sell assets you believe will go down in value - without even owning the assets first!

This is called short selling. And while there are a large number of traders who do not sell short, knowing and understanding short selling is important for all traders.

Short selling is the strategy of making money on the decline of an asset like a stock. By borrowing the asset from their broker, short sellers sell the asset on the open market. After the asset declines in price, the short seller buys it back and returns it to his broker, keeping the difference as profit.

Trading requires liquid markets, meaning markets with a lot of buying and selling. Trading also requires volatility, which means movement of prices up and down. The stock market is one of the most popular places for traders to trade because the stock market has a lot of liquidity and because there are a large number of stocks with the necessary volatility to make trading worthwhile.

Investing and trading are not mutually exclusive. Many traders are investors in the same markets they trade. And many traders invest their gains in less liquid markets such as real estate. You can be an investor who trades around his or her long term investment positions. You can also be a trader who invests his or her profits, developing a net worth distinct from trading.

Investing is often viewed as safer than trading. For example, many people choose to trade smaller amounts of money as a hobby, and invest larger amounts long term in a retirement fund. Investing is safer if you invest in the right stocks at the right time. But investors tend to lose money by remaining in stocks or other assets as their price declines, not selling the assets, as a trader would once those assets had started to lose money.

Invest and trade for a healthy portfolio

You should employ a combination of trading and investing in your personal portfolio. Invest your primary funds in solid, historically well - performing investments, be they stocks or funds. Consider allowing someone to manage your investment money.

At the same time, keep a portion of your capital to trade. This will allow you to take advantage of shorter term moves in the market as they develop.

Investing is a passive, normally long term endeavor. Trading is generally short term, and requires both a liquid market with lots of buying and selling, as well as assets with a higher than average volatility. For those who own stocks, both investing and trading have important roles to play.

Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.