Investing vs Trading: What’s the difference? — There are two common approaches to make money from the stock market. The first one is investing and second is trading. However, the difference between them might not be easily understandable for beginners. A lot of people trade in stocks and confuse them by investing. In this article, we are going to discuss the difference between investing vs trading.
Investing vs Trading
To start with, while investing aims to create wealth over the long term by buying good companies and holding it for a long duration, trading is quite the opposite of it. Trading aims at generating profits by frequently buying and selling stocks.
Example 1: If you buy a stock today and commits to holds the stock for the next three years, then you are investing. Here you believe that the price of that stock will be way higher after three years than what it is today.
Example 2: If you buy a stock today morning and commits to selling the stock by evening (before the market closes on the same day), then you are trading. Here you believe to make a profit by the difference in your purchase and selling price.
The time period for investing is long term and many a time the holding period maybe even decades. You can find many peoples investing for their children or grandchildren. In fact, a lot of people inherit the stocks that were bought by their parents and they might worth millions today.
On the other hand, the time period for trading is short-term. It can be minutes, hours, day or a few weeks. Sometimes the trading period is even less than a minute when traders buy/sell stocks with explosive movements and book profit soon enough.
Further, the attitudes of the people who follow these approaches are different. The investors are inclined towards stress-free sound investment for wealth creation over the long term. However, traders tend to make big profits in a short period of time. They also have a love for the game of trading and find it entertaining.
Investors tend to make sound investments and relax. On the other hand, traders are actively involved in the market and require their time & presence to make profits.
Basic Comparision: Investing vs Trading
|Aim||Creating wealth over a long period of time by buying and holding.||Generating profit by frequent buying and selling of stocks.|
|Daily market fluctuations||Daily market fluctuations do not affect investors as they aim for long-term.||They tend to get benefit of the daily market fluctuations by buying and selling stocks|
|Add on benefits||Investors enjoys perks like the bonus, dividends, stock split etc||Traders hold the stocks only for short interval and hence doesnÕt enjoy these perks.|
|Protective element||Investing in the fundamentally strong company that will bounce back to true value over time and losses will be recovered.||Stop loss is used to limit the losses.|
|Indicators||Fundamental indicators like Earnings per share, Price to earnings, current ratio etc are used.||Technical indicators like moving averages, stochastic oscillators, RSI etc are used.|
|Period||Long term||Short term- day/week|
|Strategy||Creating wealth by compound interest and dividend||Timing the market (finding the right time to enter and exit a stock)|
|Risk||Low risk but low potential return in short term. Good returns in long term.||High risk but higher potential return in short term.|
|Factors affecting the approach.||Business fundamentals like industry, economy, financials, market, competitors etc.||Technical indicators, the psychology of the market, money management, risk-reward etc|
|Belief||The company will perform well in the future and will reward its shareholders.||Share price will move in a direction to achieve the target profits.|
|Expected return||15-20% return per annum (compounded).||8-10% return per month.|
|Brokerage charges||Very fewer brokerage charges are involved due to buying and holding strategy.||Trading involves high brokerage due to frequent buying and selling.|
|Involvement required||Investors make the sound investment after deep study of a company and relax afterward.||Require activeÊinvolvement in the market to find the correct time to enter and exit in order to book profits.|
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Both these approaches are a successful way to make money from the stock market. However, if you planning to choose one approach, think about the time that you can spend ‘daily’ on market activities. If you can daily spend hours in the market, then trading suits you. Otherwise, investing is a better approach for you.
Moreover, it also depends on your knowledge. If you have an interest in reading financials, accounting, news, economy, etc then investing is good for you. On the other hand, if you are good with trends and charts, trading makes more sense.
Finally, comes your preference. As discussed in the post many people enjoy the game of trading while many want to be relaxed once they invested their money. Your personal preference has a high weight for selecting your style.