What is Trading?

Trading is one of those tricky investing terms that can mean different things depending on the context

At the most basic level, trading stocks simply means the buying and selling of stocks. If you’ve ever bought or sold a stock, then you’ve been involved in trading. But like many things in the investment world, context is important, and there is a big difference between trading stocks and investing in stocks.

When you invest in a stock, you’re committing to the long haul, at least within reason. That could be six months or five years or forever, but the intention is to put money into your chosen stocks and give that money time to grow and work for you.

Trading, on the other hand, is noted for extremely quick holdings, to exploit short-term market inefficiencies. These short-term positions can be in a wide range of investment categories: stocks, options, futures, currencies, exchange traded funds (ETFs), and virtually any other investment that can be traded electronically.

You’re probably most familiar with the concept in terms of day trading. From an investing standpoint, however, day trading is like gambling. We know that the stock market goes up over time. Day to day, you have no idea which direction the market is headed, and individual stocks can be even more difficult to pinpoint. Sure, people can succeed in doing it, but it takes considerable practice. You can’t just dive into day trading and expect to make money with any consistency.

We’re not completely averse to short-term trading. After all, we have an advisory called Cabot Top Ten Trader, which every week recommends the 10 hottest stocks on the market, complete with buy ranges and loss limits. But the timeline for owning the stocks Top Ten Trader recommends is weeks or months—not days, and certainly not one day.

There’s nothing wrong with trying to make a quick profit. In fact, the quicker you profit from your investments the better. But to make money in investing, the longer your timeline, the more the odds are in your favor. With day trading, your odds are a flip of the coin—at best.

To keep you on your toes, though, there’s also trading volume. Trading volume reflects the overall activity of the market, indicating the sheer amount of buying and selling of securities. Next to price, it is one of the most closely watched indicators.

Specifically, trading volume represents the total number of stock shares, bonds or commodities futures contracts traded during a certain period of time.

The major exchanges report trading volume figures on a daily basis, both for individual issues trading and for the total amount of trading executed on the exchange. Trading volume indicates market liquidity and the supply and demand for securities.

To get a more in-depth look at investing, trading, and all the important stock market information, download our FREE report, How to Invest in Stocks and Other Investing Basics, right now. This report gives you the information you need to start investing on your own.