Trading Vs Investing – key Differences and Which Is Good?
Trading Vs Investing is a relevant and known word for those who are aware of stock market.
Investing is long-term and has lower risk, while trading is short-term and has more risk. Also both have the potential to earn profits. Trading can be thrilling to earn quick money, but it is like more risky which can also lead to big losses. Investing leads to term wins but with few severe losses.
If you are interested to make money with share market then definitely you will be familiar with two important terms i.e. Trading and Investing, but if you don’t understand this terms exactly then this article will help you.
What Is Trading?
Trading is a short-term process that involves buying and selling stocks, commodities, currencies, derivatives or other financial instruments. The main objective is to make profits from short-term movement in prices of these securities. So traders take advantage of market volatility by frequently buying and selling stocks. Also, traders can asses these opportunities using trading chart based techniques to detect short-term price pattern. For trading you need do technical analysis.
Trading offers good liquidity and profits, and you must also understand that it is also the easiest way of losing money. So the trading strategy is risky and not a good option for beginners.
Trading’s goal is to generate returns that outperforms buy-and-hold investing. While investors may be content with annual returns of 10% to 15%, traders might seek a 10% return each month.
The approach is consistently aggressive, and a trader constantly searches for opportunities to score at every instance. the risk with trading is much higher than investing because of a reduced margin for error.
Types of Trading
- Position Trading – These traders buy a stock and hold it for few months. They wait for the best selling opportunities within this span to gain from.
- Swing Trading – In this trading traders buy a stock for days or week to gain from the anticipated upward movements.
- Day Trading – Day traders purchase a stock in the morning and sell them before market closes.
- Scalp Traders – Scalp Traders keep high margins in play to gain from the smallest possible price changes. traders purchase a stock for few seconds or few minutes and they make profit out of this small opportunity.
What Is Investing?
Investing is buying an asset, like an individual stock, mutual fund, or exchange-traded fund(ETF), in hopes of increasing your money over a period of time. Because most people invest for long-term goals, like buying a house, saving for their children, paying for college or saving for their retirements, they tend to hold these assets for along time – it means year.
Investing is a long-term approach, this method requires patience because investors must hold these stocks and holding them for years gives them benefit of dividends, bonuses, buybacks, stock splits, etc. Therefore, investors are prepared for the ups and downs of market.
Investing involves fundamental researches like Price-to-earnings ratio, management background, and many other things and identifying the potential investment target. One more thing, investing aims to make a portfolio with different stocks and instruments that can increase in value over the period.
Types Of Investing
- Value Investing – It aims at reducing the risk to maintain the value of the investment. Investors buy shares of only well established companies.
- Growth Investing – This approach gives focus on growing the value of investments. Investors buy stocks that have higher growth potential.
Trading Vs Investing : Main Differences
The table given below helps you to understand the main difference between Trading Vs Investing.
Specification Trading Investing
Objective To buy stocks for To buy and hold stocks for
short term long term and grow capital
Risk Higher Lower
Time Horizon Short term, few seconds Long term, few years
or few months
Capital Growth Short-term profits Higher gains by maximizing risk
Income Only by making strategies to Earn regular income by dividends or bonus
Leverage Yes No
Types of Analysis Technical Fundamental
Costs Higher fees Limited fees
Capital Gains Only short term Both Long and short term
Trading Vs Investing : Which Is Good?
Investing is comparatively easy than trading. While investing requires understanding the company’s financial strength and entering it. Trading requires high market skills, real-time analysis, and identifying the stocks price movement in a fraction of seconds to execute.
People who have little time and want passive income can do investment. There is more probability of capital gain. On the other hand, if you have good and proper knowledge with great sense of market then you can try your luck in trading. However, its not recommended, as it has the probability loss is quite high.
Many people wants join share market but they often get confuse about trading or investing. But it is simple to see why because there are some distinct similarities, such as the need to open Demat accounts, deposit money, and buy and sell assets. But both are different. Investors have a much longer time horizon than the traders. Traders have a better and deep understanding of market.
So, whether you are an investor or trader, you should be aware of the rewards as well as the risk involved in this market.