Trading Vs Investing: What's the difference?

16 Apr 2021  Read 401 Views

From our complicated formulas to life’s deadliest decisions, there are quite a number of instances where your mind plays tricks with you. As a result, you stand at a cross-road, all confused, not knowing which way to go. Most of you might have encountered a similar experience when it comes to share markets. 


Difference between Trading and Investing 

Through trading and investing are two different terms, we often use them interchangeably and confuse them with one another. So, let’s address your confusion one last time. Shall we? 

Trading in the stock market

If you are someone who is constantly buying and selling, with a view to make a profit through the small changes in the prices, then you will fall under the category of a trader, and the activity you are performing can be termed as trading. The longest period the trader may hold a stock is for a few months. Or to say, you can understand that the trader is someone who is very much concerned about the short term goals rather than the long term goals

They hold stocks for days, hours and even minutes. A trader can be broadly classified as follows -

  1. Intraday 
    • Day traders 
    • Scalp traders
  2. Position traders
  3. Swing traders 

All these traders exhibit a similar behaviour except for the time period for which they will be holding their securities and positions. They aim to buy low and sell at a relatively higher price.

  • Day traders 

This sort of trading is most suitable for someone who holds tons of knowledge about the markets. Day traders are highly optimistic. They do not like to hold their shares beyond a day. They mostly hold their securities for an hour or more. They become extremely active during times of market volatility. 

  • Scalp traders 

Scalping is where a trader makes multiple buying and selling in order to reap his profits. They try to make small profits in each and every trade and ensure the aggregate sum fulfils their return targets. These traders hold their position for minutes, and whenever the price goes up even by Rs 0.50, they try to sell and make a marginal profit. There are instances when their tricks fail, and they are left with losses. 

  • Swing traders 

Swing traders, unlike intraday traders, hold their security for days. They do not mind having the securities overnight. They try to predict the trend overnight. They are also similar to others and aim to make a profit by changing prices. 

  • Position trader 

Position traders are the type who sticks with their positions for months or weeks. They look for the right time to sell their securities and make profits. Hence unlike others, they concentrate on big price movements that might happen in the market. 

Investing in the stock market

So what is investing then? This, unlike trading, demands years of hard work and consistent efforts. Investing is where you have a goal and a strategy. You have to follow them religiously in order to achieve your long term aspirations and to let your wealth grow. They are less disturbed by short term fluctuations and market tensions. And this will be the category that most of us will fall under to fulfil our goals of having a joyful vacation or retiring young. Investing is mainly driven by fundamental (and some technical) analysis of various stocks and sticking with them as they grow.

An investor may use a wide variety of strategies to achieve his target. However, some of the major investment approaches utilized by most of the investors are as follows -

  • Passive investing 

As the name itself suggests, these investors put their money in particular security and forget about it. These are the investors who are either reluctant to take risk or do not know their way in the markets. 

  • Active Investing 

On the contrary, these investors constantly allocate and reallocate their capital as the market changes. Their aim is to get the best out of their investment. They follow the trends and are ready to grab any opportunity thrown their way. 

  • Growth Investing 

Here, investors choose a company based on its intrinsic value. Say a company has good prospects for growth in the upcoming two years, then they will go for it. It is basically finding out the undervalued stocks in the market. 

  • Income investing 

These investors go in for investments that will offer a secondary path of income for them. They choose their investments keeping this in mind and offer little to no regard for the time period. 

Trading vs Investing 

Both traders and investors are keen on making a profit. However, they take up different routes to fulfil it. Apart from that, they also have certain distinguishing features. 

Particulars

Trading

Investing

Time period 

A trader opts for a security or holds the positions for a shorter period ranging between minutes to months. 

An investor mostly holds it for a longer period which might be anything between a year to a decade or more. 

Market volatility 

Traders become highly active during times when there is high market volatility. 

Short term market fluctuations have a lesser impact on the portfolio of those who are investing. 

Securities 

They usually opt for securities that are highly liquid. 

They invest in particular security when it aligns with their risk profile and objectives. 

Market knowledge 

A trader should always be on his toes. He should hold immense knowledge about the market. 

An investor needs to be more informed about the growth prospects of the economy, the industry and the company, than the markets.

Risk 

Highly risky.

It is less risky than trading. 

So which one is for you?

In order to trade actively, you will need to have a high-risk profile. You should be comfortable with incurring losses and operating in high fluctuating scenarios. Also, it requires you to spend a lot of time, and for a person who is having a full-time job, trading can be tiresome. That being said, if you are someone who feels happy and comfortable by being actively employed in the markets, then trading might be the right one for you. 

On the other hand, in investing, you will have to choose the right stock and stick with it. Even if you hold no prior knowledge, you can still find your way and construct a sound portfolio in no time. All you need to have is an objective, a proper strategy and research. 

Final words

While investing happens to be the best choice, it might vary from person to person. If you are still confused, you can try out both and choose the one that best suits you. Ensure you always start as small as possible and grow as you gain knowledge and experience in the field.

So, what would you prefer, Investing or Trading, and why? Let us know in the comments below.

About the Author: Varishika Dinesh | 103 Post(s)

Varishika is on the verge of successfully completing B.Com. Nothing excites her more than reading books and watching movies. Business, finance, economy? You have her attention.

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