Difference between Trading and Investing

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Stock Trading and Investing are two different ways in which one can make a profit in the financial markets. An investor is one who holds the position or the security for a longer period and is a long-term player, while the trader is one who is affected by the movement of the securities in the market.

  • Investing and trading both involve buying financial assets, such as stocks, ETFs, and bonds, with the goal of growing your money.
  • The difference is in the timeline. Stock trading is about buying and selling shares for short-term profit, such as within a week or a day. Investing refers to buying and selling stocks for long-term gains, such as within months or years.

What is Investing

Investing is where you buy stocks for a longer time to earn an additional income or profit. You are keeping your money aside for a decent return in the future. Buying and holding a good portfolio comprising stocks and other investment instruments like bonds , mutual funds, etc., can help build wealth over the long term.

Long-term investors mostly opt for stocks with fundamentals that depict a strong growth potential in the long term.

Types of Investing

There are various types of investing styles that is practiced by investors. There are various kinds of investing in the market, and it is important to understand the broad categories so that you can choose your own investing style accordingly.

Active Investing

Active Investing involves fund managers or portfolio managers that manage an investor’s money on their behalf, and they charge a fee against their services. The fees for this can be high as actively managed funds are managed by experts.

Passive Investing

Passive investing is done by investors who themselves like to manage their funds and do not want to depend on a fund manager to do it for them. The cost here is low as an investor does not have pay any expert or management fees.

Value Investing

Value investing is a form of investing where investors choose to invest in already strong and established firms. Investors shy away from exposing their investment to a high-risk situation and based on historical performance of a proven company, they look for more stability.

Growth Investing

Growth investing involves more risk as growth investors look for higher return on capital through their investments. Growth investors would ideally look for high growth rates along with high return potential. Such investments do come with certain amount of risk and investor must factor-in that aspect while investing.

What is Trading

Trading refers to buying and selling stocks or other securities for a shorter time, like a week or a day. The goal is to generate returns in a short time. Let’s say an investor may generate an annual return of 15% to 20%, whereas a trader may seek a 15% return every month. However, intraday trading involves comparatively higher risk. You need to open a trading account along with a Demat account.

While investing means buying and holding shares for a longer duration, trading seeks to profit in a shorter period. Traders use technical analysis tools to evaluate the stock price movement, such as Stochastic Oscillators, Moving Averages, RSI, MACD, etc., to identify a profitable trade setup.

Types of Trading

  • Intraday Trading/Day Trading – You buy and sell stocks on the same day in this form of trading. It is also known as Day Trading. Your trade must be squared off on the same day as per the regulations set by SEBI.
  • Futures & Options Trading – Also known as derivatives trading, it simply means that a contract whose value depend on the prices of an underlying asset. A trader speculates on the prices of these contracts and tries to earn returns through price movements. Futures and Options trading also involves taking leverage.
  • Delivery Trading – This is also known as investing, where a trader or investor buys shares, holds them for their desired period, and sells once it is convenient. The key difference between delivery and other forms of trading is that this takes place without any leverage, there is no short selling involved, and the positions may go on for decades even.
  • Swing Trading – Here a trader will take positions on their desired shares usually for a few weeks.
  • Scalp Trading – This involves high leverage where a trader aims to make a small profit even with the slightest of price changes.

Main Difference Between Investing and Trading

Risk Involved

    • Risk involved is lesser as the stocks are held for a longer period and it rides out various market ups and downs
    • Risk involved is high as the traders use leverage that can impact the invested capital even with slight movements in prices
    • Market volatility in the short-term has little impact on investments as investors are ready to hold on to it for long periods
    • Trading involves capitalising on small price movements and it can cause high losses if the price starts to move in the opposite direction and the trader has not used a stop-loss order

    Period of Investment

      • The period of investment here are usually long and it is very similar to running a marathon where you must be patient to achieve your target
      • Trading is usually for short-term, and it involves capitalising on periodic price changes
      • Investors may hold on to their investments for even decades and would want to ride-out patiently various volatile phases in the market
      • Traders embrace the risk of market volatility and like to capitalise on price fluctuations even during volatile markets. Traders may sell a stock in a couple of hours or they may wait for weeks as well, if required.

      Capital Growth

        • Investing involves growing your capital slowly and gradually by holding on to them.
        • Traders aim to make quick profits
        • Investors grow their capital with time but also get to enjoy the other benefits such as dividends.
        • Traders grow their capital by constantly looking for the right opportunities to execute their trades and prepare strategies for a successful trading journey

        Effort Involved

          • Investing involves very little effort on a regular basis as investors are ready to hold on for long period
          • Trading requires considerable amount of effort as this involves analysing the markets thoroughly before you take a trade
          • Investing requires identifying the right companies with a strong potential to grow in the future and understanding the company fundamentals before you take a long-term position on their shares
          • Trading requires substantial analysis. It is popularly known as technical analysis that includes reading the charts and identifying patterns in the price movements of shares. It also includes preparing sound strategies to avoid losses or mistakes. The risk in trading is high with the leverage used and thus a trader needs to be careful

          Style of Analysis

            • Investing involves fundamental analysis
            • Trading requires technical analysis
            • Fundamental analysis requires checking the company financials, balance-sheets, important ratios and most importantly, their potential to grow with time
            • Trading requires analysing charts, identifying patterns emerging from price movements, using indicators to generate buying and selling signals and keeping the daily market sentiment in check

            Who should invest and who should trade?

            It is important to understand first that both trading and investing can be done by anyone. The requirements though for both categories may be different but, these are not skills that can be acquired only in an institution. These skills can be improved upon with more time and practice.

            Investing is very simple and almost anyone with no prior knowledge of the stock market can start right away. You need to pick a stock that you want to invest in and simply invest through your Demat & Trading A/c . You just need to keep a track of your investment on regular intervals.

            Trading requires a little more skill than investing as analyzing the charts and patterns of a share is a key element of it. Also, the knowledge of indicators and technical analysis in general is important for a trader. A trader looking to make money on the stock market must dedicate a certain amount of time in acquiring those skills.

            Trading vs Investing: Which is better?

            Even though investing and trading both aims at profit making, there are different strategies. However, trading can be comparatively riskier because of the below reasons:

            • In trading, several analysis and forecasting is needed to make quick decisions
            • A day trader closes the position within the same day so has to closely monitor and adjust the position. One should understand that Trading can lead to profits in short time but it has risk involved. So, if you are a person who can take risk, then trading is for you, and if you have a low-risk tolerance then you can prefer investing.

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