Difference between trading and investing

Difference between Trading and Investing. Which is better?

Trading vs Investing. If you are new to the stock market you might be thinking that, is there a difference, aren’t both the same? Well, no they are not the same and there is pretty much a big difference between trading and investing. One is fast and one is slow. But the tradeoff is that one is hard and the other one is somewhat easy. Just stay with us till the end of the article and you will know everything about trading and investing and also which one is better for you.

What is Stock Market Investing?

What is Stock Market Investing?

Investing is a long-term strategy in which the goal is to purchase stocks or other financial assets that generate returns over a long period of time. Investing is done for years and even decades which allows investors to benefit from various perks such as dividends, bonuses, buybacks, stock splits, and so on. Furthermore, the risk of downtrends and market fluctuation is eliminated in investing because there is always the expectation that prices will rise, and because it is a long-term investment, the investor need not be concerned about the particular downtrend because it will last for a shorter period.

Investing requires performing fundamental research such as the price-to-earnings ratio, debt-to-equity ratio, management history, and so on, as well as finding suitable investment targets. Investing also tries to build a portfolio of different equities and assets that can grow in value over time.

The investing process does not recommend selling holdings frequently. Sell ideally during an emergency or when the stock has hit its target price. Investors must, however, keep track of their stock investments because they are volatile, and any change or news might have a long-term impact on such equities.

Types of investing

  • Value Investing: – This approach aims at reducing the risk to maintain the value of the investment. Investors purchase shares of only well-established companies. There is less growth in this approach. 
  • Growth Investing: – This strategy focuses on increasing the value of assets. Stocks with better growth potential are purchased by investors. This raises the risk quotient as well as the chances for growth.

What is Stock Market Trading?

What is Stock Market Trading?

Trading is a short-term and volatile practice that requires several trades depending on market movements. The main aim is to benefit from the short-term price movement of these securities. Stocks, commodities, currencies or Forex, and other financial instruments are common instances of trading. Traders evaluate various possibilities by chart-based methods or by employing trading algorithms to spot short-term price trends. Short-term patterns aid in determining support and resistance levels, as well as entry and exit locations. This discipline of study is known as technical analysis.

Trading provides good liquidity and profits but traders are aware that it is also the most common way to lose money. Trading profitably in the stock market requires real trading knowledge and skill which is acquired only through rigorous study and high practice in markets. Therefore, this method is risky and not ideal for beginners.

Types of Trading: –

  • Position Trading: – In this type of trading a trader is basically positioning himself for a large move. These traders purchase a stock and hold it for a few months.
  • Swing Trading: – Swing traders are those who take a trade for a few days to weeks. They look to benefit from one clean swing in the market.
  • Day Trading: – Day trading also popularly known as intraday trading. Here traders initiate a position any time during a trading session and close the trade before the market closes. The goal is to profit from the one-day movement.
  • Scalp trading: – Scalp traders use big margins to profit on the tiniest price swings. These traders purchase a stock for a few seconds or minutes. They profit from the smallest opportunity.

Trading vs Investing: Which is better?

The key distinction between investing and trading is the use of technique in both strategies. In investing, the investor employs fundamental study of the company, but in trading, there is use of technical analysis. Investing requires a complete understanding of a company’s financial strength. On the other hand, Trading needs advanced market knowledge, real-time research, and the ability to identify stock price changes. In today’s data driven world, there is even a third school of security analysis, Quantitative Analysis. It uses mathematical and statistical methods. Also, there is a significant overlap between traders and investors themselves and also the type of analysis they use. However, beginners are better off with one type of analysis and learning it thoroughly.

You can select both or any of these options based on your risk tolerance, patience, knowledge, and skill. Investing is a long-term strategy with lower risk, whereas trading is a short-term strategy with more risk. Furthermore, both have the potential to generate profits. Trading may be an exciting way to make quick money, but it is highly improbable for this to happen due to a lack of essential skills, which can also result in large losses. While Investing results in long-term gains with minimal but significant losses. 

Who should invest and who should trade?

When studying the stock market, you must consider how much time you have available. Investing is simpler and comparatively easier than trading. It can be done in much less time per day, and you can also take your time researching and coming to a decision. But trading requires hours each day examining charts and graphs. Also, you have to make a quick decision here as the market can move very fast.

In short, if you are new in the stock market start with learning investing. Go with a pace you’re comfortable with. Starting with investing in a mutual fund is even better.

Summary

It is very important to not to over commit in the market. If you have a job or business or any other source of income stick to it. Try to grow there. Take stock market as part time at best. If you think you will make, quick and large amount of money by trading in the stock market then you can’t be more wrong. Trading is hard and requires a high level of expertise. Trading is for those who are either somehow related to the stock market or are very passionate about trading in the market and are willing to commit years of their life to the learning curve of trading. Always remember stock market is the last place to make easy and quick money. Don’t get misled by false claims and unrealistic dreams.

Hope you liked the content and got to learn many things about the difference between trading and investing. Comment any doubts you may have and share this article with your friends.

HAPPY LEARNING