Investing and trading are two different mechanisms employed to generate profit in the financial markets. A classic example of differentiating between investing and trading is to assume you bought a few seeds and sold them in a day because you were able to book a profit. However, if you keep those seeds for a long period of time till they give you more seeds, you will be able to sell more seeds at a future date. The first instance is a case of trading while the second instance is a case of investing.
Through this blog, we try to summarize the main differences between investing and trading based on various aspects like the duration of investment or trade, strategies used and when one might be used over the other.
What is Investing?
Investing refers to buying stocks or other financial instruments that are expected to fetch returns over a long period of time. In investing, investors select bonds or stocks of companies which are expected to grow in the long term. An investor’s aim is to create a balanced portfolio of various bonds and stocks that will increase their value along with giving returns in the form of dividend and interest income. Investing requires a lot of research about potential investment target, expected future price and various other aspects.
Thus, investors do not sell their holdings on a regular basis and do so only in case of an emergency or when their long-term targets are met. Some approaches to Investing include:-
Value Investing: - This approach aims to reduce the risk to maintain the value of investment. In this case, shares of only well-established companies are purchased thereby leading to less growth.
Growth Investing: - This approach focuses on growing the value of investments. Investors purchase stocks that have higher growth potential which increases the risk potential as well as the growth prospects.
What is Trading?
Trading is associated with buying and selling of stocks, commodities, bonds or other financial instruments over shorter periods of time, primarily to make profits from short-term price movements of these securities. Trading refers to capitalizing the short-term mispricing in the market prices. Traders make short-term positions in stocks which can vary from seconds to months.
Traders essentially take advantage of the volatility and make use of trading systems or chart-based techniques to avail good trading opportunities. Traders detect short-term patterns in prices and are involved in more frequent buying and selling of stocks or other financial instruments. A few types of trading include:-
Position Trading:- Under this approach, traders buy a stock and hold it for a few months. During this period, they look for the best selling chances to gain from.
Swing Trading:- Traders involved in this type of trading, purchase a stock for days or weeks to gain from the anticipated upward movement.
Day Trading or Intraday Trading:- In day trading, traders generally buy stocks in the morning and sell them before the market closes. In this way, they capitalize on the single day volatility cause by positive news or market sentiment.
Scalp Trading: - Scalp Traders keep high margins in play to gain from the minutest possible price changes during online share trading. These traders buy a stock for a few seconds or minutes and make profits from the smallest of opportunities. These traders have immense knowledge of investing in stock market.
Key Differences between Investing and Trading:-
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Basis of Difference
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Investing
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Trading
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Period of Investment
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Long-Term
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Short-Term
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Risk Involved
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Risk involved is lower because investors do not make decisions during short-term volatility.
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Risk involved is higher because traders try to make maximum profits from short-term volatility and it is highly unpredictable
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Capital Growth
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Investors focus on creating wealth over the long-term with risk minimization. Moreover, passive income growth is derived in the form of dividends, bonus and long-term capital gains
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Traders focus on making short-term profits. However, if they strategize regularly for a long time, they too can grow their capital.
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Efforts Required
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Investing requires more efforts initially but over a period of time less effort is required in keeping track of your investments. Investors have to make a decision based on the growth prospects of the company
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Trading requires more efforts as it involves regular analysis to identify mispricing and market changes. Thus, the frequency of analysis is high in trading
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Method of Analysis
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In Investing, Fundamental Analysis is performed and involves analyzing Statements of Accounts, cash flows and future growth prospects.
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In Trading, Technical Analysis is performed and involves analyzing charts, graphs and past movements.
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It must be understood that investing in stock market is both an art and skill and profits depend entirely on market movements and correct choice of investment. Thus, trading and investing both approaches must be used wisely. Further, it is pertinent to note that trading requires high market skills, real-time analysis, identifying the price movement and taking prompt actions. Retail Investors who wish to grow their money over a period of time without devoting much time to analysis must indulge in investing rather than online share trading.
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