Let’s learn what are the similarities and differences between two common words of the stock market world: Trading and Investment. Grab simple yet useful details on Stock Trading vs. Investing, the most important and interesting concepts in the share market.
Everyday – Everyone is worried about the gains and profit. The first answer which comes in our mind when someone asks “Why do we invest?” is that: to earn profits. Right! Investment or trading are the sides of the same coin. Both are activities undertaken for the benefit or purpose of generating profits and increasing one’s wealth.
Even though “trading” and “investing” in the English dictionary mean the same i.e. buying and selling for gaining a return. But, the route or mode for this profit earning is quite different. Where Investment is done for a longer period of time, trading on the other hand is done for a smaller period of time.
Now, let’s go ahead and deep dive into the details between the two similar sounding but different terms.
Trading vs Investing: Differences to Know
Traders are the individual who follows market rigorously. Trading lets you benefit and encash from all the ups and downs on the market on a regular basis. So, active traders are involved in Inter-day and Intra-day trading of shares and instruments (commodities, currencies etc.) to gain regular profits. There is not much concept of waiting and holding in their case.
On the other hand, investing is usually done for longer duration to attain desired results. So, investors are the ones who lock-in the funds in the market and hold on their holding until it reaches their targeted price. When it does so, then they go ahead and sell the same to earn a profit. Investors might not follow the stock market news on a daily basis.
Trader vs Investor: Who are you?
Which category you belong to: Stock Trader or Investor? Go through the below points, and check for yourself this crucial aspect.
1. Period of Investments
As seen above, the time period of traders making a buy and sell is shorter in comparison to that of the period involved in investing. As the investor has to patiently wait for the price to reach the planned hike, the period of holding for investors are at the higher end.
No doubt, investors and traders both are risking their capital and funds. But, trading involves a more perpetual risk than the risk for the investors as there is continuous and rigorous money movement and fluctuating market. So, if you are a newbie in the stock market, you should start small to avoid taking bigger risks initially.
You might have heard a number of times that “Stock markets are subject to market risks” and this is very true. Investing or trading, whichever way you choose, there isn’t any guarantee of assured returns.
However, the risk factor is higher for stock trading as compared to investing.
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As the risk is more in trading, the chances of higher returns is also there. The investors’ return is dependent on his or her decision as the money is not continuously moving from one stock to another. Thus, the stock held and dividend offered remains unchanged unless the amount is dis-invested or moved out from low paying instrument.
At the same time, the yield percentage is comparatively higher for traders as they keep shifting money from low earning stocks to higher earning stocks.
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4. Capital Growth
Trading is a play of time. Thus, one needs to monitor the fluctuating market conditions on a regular basis. Each day a new fluctuation adds to the profit and loss for the day. Ultimately, this sums up to the wealth or net worth of an individual.
Whereas investing is a formulated plan over the periods, the dividend and interest earned along with rising price adds to the complete yield and income of the person.
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Investing vs Trading: The Bottom Line
Both, investing and trading are skill-driven techniques. These help us attain the basic need of “making money”. However, both are different in their own ways and approaches, as we just saw above. So, it’s your own decision and perception which actually makes a significant difference.
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Now, you have analysed the difference between stock trading vs investment. Which one do you prefer: Trading or Investing? Do you call yourself a safe investor or a regular trader? Either ways, you need to be cautious while handling your money and do proper research before taking any financial decision.