Investing and trading, investor and trader – these words are often used interchangeably, which is quite wrong because there is a lot of difference between them both. We are going to look at some important differences between investing and trading.
Firstly, both require capital or money (in layman terms). Next, they both require you to inject the amount in that particular stock. Finally, both of them require some level of conceptual knowledge. Now, let us proceed with the main topic Investing Vs Trading.
Investing Vs Trading in Stock Market
1. Time Duration
This is probably the most important difference between trading and investing.
A trader aims to earn profits over a short period, and an investor seeks to make profits over a long period.
Trading generally happens in a day, month, or quarter at most. A trader seeks to profit off of minor movements of the stock price. Also, if you buy and sell stocks on the same trading day, it is known as intraday trading. A trader needs a good amount of capital to book profits.
Investing is a process that requires a lot of time and patience. It involves buying and holding, in contrast to trading – which involves buying and selling.
The investor holds the stock for a long duration and yields long-term profits.
A trader does not generally build a portfolio and focuses on a single stock or security. A trader singles out a stock, which is mispriced and takes advantage of that mispricing. Once that price comes to actual, he moves on to different mispricing.
An investor builds a portfolio firstly and then invests in it – either a lump sum or a SIP. The portfolio is necessary for an investor to reduce the overall risk impact on his investments. To cancel out short-term risks, the investor studies the companies, and only then does he build his portfolio and invest.
The overall risk in trading is much higher than in investing. How? In trading, the amount invested is huge and is mostly based on a single stock, which is mispriced. I guess you see the point. Traders do not get the privilege of good risk tolerance, unlike investors.
Additionally, not all traders have access to a huge capital, so they use leverage (debt). This increases the overall risk on their heads. If they fail to book a profit, they will become serious debtors.
On the other hand, the risk associated with investors is far smaller than traders. Investors hold the security for a long time, minimizing their short-term price risk. Also, they build a normally diversified portfolio, which ensures maximum return with minimized risk. On top of that – they do not need to invest in a lump sum; they can invest in regular intervals (SIP).
Since they follow all these procedures, the overall risk on their investment is reduced drastically. In this case, investors beat traders.
Risk management in the stock market is a very important concept and requires technical knowledge, which is why I bring to you The Thought Tree – one of the best Stock Market Institute in India. They have great courses on the stock market, and they are the best in the market because they have a unique curriculum with a more practice-based orientation and real-time trading sessions. Moving on!
This is a seriously debatable point of difference. Some say that traders get a better return, whereas some say that the risk in trading is too high and not worth the return they receive. Investing is the key to build long-term wealth.
Trading is good for short-term profits and short-lived money, whereas the whole point of investing is wealth growth along with wealth accumulation.
Agreed that traders get their profits earlier and in a short time – this is not a guaranteed profit, and the associated risk is high. The same risk is mitigated in investing, where the investors get the maximum return.
Technical analysis is the method of studying stocks with the help of graphs and patterns. It uses the current trend of that particular stock and market to predict any stock’s short-term future movements. It is helpful for short-term traders who seek to earn quick profits. The most amazing tools used in technical analysis are overlays and oscillators. An example of overlays is Bollinger Bands, whereas an example of oscillators is MACD.
Investing is often associated with fundamental analysis. Fundamental analysis is the method of analyzing any organization with the help of quantitative and qualitative features. Quantitative features can be expressed in numbers – Balance Sheet, Cash flow, Income-Expenditure, Economic, and so on. Qualitative features cannot be expressed in number and relate more to the qualities – The Board of Directors, Operations, Goodwill, and so on.
Fundamental analysis is used for long-term investments and usually is your best friend for creating long-term wealth.
These were some of the key differences between trading and investing. I hope all your doubts are clear regarding Investing Vs Trading. If you want to become a pro in the stock market then join– The Thought Tree. Stay tuned for more!