Trading and Investing are two very different ways of approaching the stock market and creating wealth. While trading seems appealing for active traders, investing works well for long term investors.
Both trading and investing drives good profits through active market participation. In trading, traders take full advantage of short term market fluctuations and earn quick returns whereas investors earn larger returns in the long run through buying and holding of a portfolio.
Investment includes buying of stocks, mutual funds, bonds and other instruments with the aim of building wealth over an extended period of time. Often investments are held for a long period of time providing several advantages such as dividends, interest and stock splits. While the market fluctuates inevitably, investors will swim through the downstream market hoping that stock price will rebound and losses will be recovered eventually.
In simple terms, Investing works best when you purchase an asset at a low price and sell it at a higher price. The return you received is what we call a capital gain. This is one of the ways of making money in investing by earning returns when you sell assets for a profit.
Whether you will earn good returns on buying security depends on 3 major factors-
- The amount of risk taken
- Holding period of stocks
- Source of returns
Types of Investments
While the investment sector is vast, we are here with some common types-
1. Stocks – When you purchase stocks of a particular company, you become a partial owner of that company. As a shareholder, you will be a part of a company’s growth and success through stock price appreciation and you will be paid regular dividends from the profits earned.
2. Bonds-Bonds are basically issued by the government and corporation when they want to raise the money for fulfilling several purposes. When you purchase bonds, you are issuing a loan with an agreement of paying back the face value on a specified date. You are entitled to acquire periodic interest and also the return of the bond’s face value at the time of maturity.
3. Funds- Funds are usually managed by investment managers in order to invest in stocks, shares, bonds etc. Most common types of funds are exchange traded funds and mutual funds. Mutual funds are not meant to be traded on exchange and are valued at the end of the trading day whereas exchange traded funds trade on stocks and are valued throughout the trading day.
Trading involves active participation in buying and selling of stocks,currency pairs,commodities etc in the financial market. The success in trading depends upon the trader’s ability to make profits over time. It aims at generating maximum returns that outperform investing.
At times trading can be risky, if a trade deal goes against you, you end up losing a lot of money in a short span of time. Often, traders tend to increase the chances of risk by borrowing money. Predicting every time accurately is not possible even though some traders are much skilled and proficient at reading charts and analysis.
Types of Trading
- Day Trading– Day trading refers to purchase and selling of a security within the same day. While traders take full advantage of small price moves if done strategically, it can be quite dangerous for beginners who are not aware of intraday strategies.
- Scalping– Scalping involves a trade that specializes in making huge out of small price changes. Scalpers need to have a strict exit strategy as one big loss could terminate many small profits.
- Fundamental Trading-Fundamental trading is a process where a trader mainly focuses on company-specific events to find out the right time to buy a particular stock. It is much associated with a buy and hold strategy.
- Momentum Trading-Momentum trading is a strategy where one purchases rising securities and sells them at higher prices. It’s all about finding the right buying opportunities in the short term and selling them when securities start to lose momentum.
- Swing Trading: Swing traders follow a trading style where they try to obtain short-to-medium gains over a period of time. fundamental traders who hold their positions longer than a single day. Swing trading requires technical analysis to determine the trading opportunities.
Difference Between Investing and Trading
|Period||Investing allows investors to invest an amount for a longer duration. In the long run investing approach, short term market fluctuations are proven to be insignificant.||Trading allows traders to hold stocks for a short period of time may be a week or more often a day.|
|Capital Growth||Investing allows you to create wealth by holding stocks in the market, you will earn compounding interest and dividend over the years.||Trading is all about price movement of stocks and right timing of the market. Usually traders sell their stocks if the price is higher.|
|Risk||Investing involves lower risk and lower returns in a short period of time but can provide higher returns by compounding interests and dividends over the years. Market fluctuations do not affect stocks for a longer period of time.||Trading involves higher risk and higher potential returns as market prices can fluctuate in a short span of time.|
|Success||Investors don’t go with the trends and always invest in value. They hold the stocks for a longer period of time and patiently wait till the time stock performs. Ultimately, investors who tend to achieve their financial goals become successful.||Traders invest money stocks for a short time period. Their main aim is to reach the higher profits in the market so they purchase and sell the stock. Missing accurate opportunities may lead to huge loss. Investors analyze the current performance of the companies to hit the higher price and gain profits in a short period of time.|
The above given information must have made it easy for you to decide whether trading or investing is a better investment option for you. Trading is a great way to make millions however it can quickly lead to huge losses. Sameway Investing gets you short-term profits, but fewer severe losses too. It’s completely your call to choose the best among the two based on your investing style and knowledge.