If you are new to the world of the stock market, you might be wondering about this: What’s the difference between trading and investing? and, Which one of those two should I be doing?
Well, in this article I will be sharing with you the difference between Investing and Trading and which one you should be doing.
Investing vs Trading
Investing and trading are two different things and it’s important to understand the difference between them before you make any decisions about your finances.
Okay so, What is Investing? Investing is when you buy shares of a particular company and hold them with the expectation of generating profit or income when the price of the underlying stock goes up, in a long period of time.
Investing is usually done for a long period of time, usually for few years to decades.
Trading, on the other hand, is buying and selling shares in a short period of time thus keeping the difference as a profit.
Traders take advantage of fluctuations in markets to enter and exit positions faster, thus resulting in more frequent profits.
Let’s dive deeper…
Investing
Investing’s goal is to consistently generate wealth over time by acquiring and maintaining a portfolio of stocks, mutual funds, and other investment instruments.
Investing is a way to make sure your money doesn’t sit around, but rather works for you, and you may reap the benefit of compounding over years.
There are varieties of investments options in stock markets:
- Stocks
- Mutual Funds
- Index Funds
- ETFs (Exchange Traded Funds)
Investing doesn’t require any knowledge of Technical Analysis. Rather an investor looks into the fundamentals of the company he is investing in. Usually, Investments are done based on one of these two factors or both: Growth potential and/or current value of the company.
One may invest in a stock without even looking at the price chart, solely based on if he/she thinks the company has growth potential, or if the company is undervalued based on the Fundamentals of the company.
Trading
The main goal of trading is to generate profit with the movement in the price of a stock or any other financial instruments.
Traders get in and out of their positions much frequently. They close their position as soon as they make a profit or their position starts to go in the opposite direction. Traders cut their losses as soon as their analysis is proven wrong.
Traders are in the market for short-term profits and take advantage of fluctuations in the markets.
Based on how frequently one trader jumps in and out of stocks or other financial markets, traders are classified into 3 categories:
- Day Trader : Holds positions ranging from a few minutes to hours. Closes positions before the market session overs.
- Swing Trader : Holds positions ranging from few days to weeks. Carries forward positions overnight.
- Scalp Trader : Holds positions ranging from few seconds to few minutes.
Account size, available trading time, level of trading skill, personality, and risk tolerance are all factors that traders consider when choosing a trading strategy.
| Investing | Trading | |
|---|---|---|
| Holding Period | Long term | Short term |
| Objective | Wealth creation | Profit generation |
| Analysis | Fundamental Analysis | Technical Analysis |
| Risk | Relatively Less Risky | Relatively Riskier |
| Skills | No skills required | Skills required |
| Timing | Timing not crucial | Timing is very crucial |
| Profitability | Relatively less profitable | Relatively more profitable |
What is more profitable?
Trading is usually more profitable than Investing. Investors aim to earn around a 10-20% profit on capital per year, on the other hand, a trader seeks to gain around 10% on his capital in a month. Thus, even if a trader earns 5% a month, his capital gain could be 60% a year.
What is riskier?
You might have gauged by now, but let me tell you: Trading is riskier than Investing. Of course, what is more profitable comes with more risk. In order to gain those big percentage profits, a trader risks a certain percentage of his capital on every trade he enters. Thus, a trader needs to be well skilled and must have a good risk appetite too in order to reap those big rewards.
On the other hand, an investor rides out his short-term losses by holding his position and lets it ride for the long term, which usually results in a profitable investment. That also means that an Investor is usually at more ease of mind than a trader.
Which one is best for you?
It depends on few factors. If you are willing to learn technical analysis, spend time analyzing charts and you have a risk appetite to earn good profits, trading is for you.
While, if you are just looking to reduce risk and your main goal is to grow your capital slow and steady, Investing is your path to take. Investing is good for those who want to put money to work and see it grow over time.
That being said, a combination of these two can be very rewarding. One can be a trader and an investor simultaneously. Most traders invest more than half of their monthly or yearly gains to safeguard their capital and let their money grow.
I hope this was helpful in understanding what is Investing and trading, and what are the differences between the two. If you have got any more questions, let us discuss them below in the comments section. Have a good one. Cheers!
