Investing and trading are the two different approaches to making a profit in the financial markets. Investors and traders both seek gains through participating in the market in different ways –
- An Investor expects big returns over a large timeframe through buying and holding the stocks.
- A trader takes advantage of both bullish or bearish markets to buy and sell over a small time period to take small but frequent profits.
Let’s discuss the difference between trading and investing further in detail.
What is Trading
Trading requires recurring transactions by entering and exiting the positions over a shorter period of time. It could be buying and selling stocks, commodities, currencies, or other instruments.
We are sticking to stock trading in this article to help you understand what is stock trading and how it is different from stock investing or value investing.
What is Stock Trading
Stock trading is making a profit by buying and selling the stock on the same day.
For example, You buy 100 Reliance shares at Rs. 2,641.29 at 10.30 am by investing Rs. 2,64,129 and sell the shares at Rs. 2,661.30 at 02.00 pm. (see the snapshot)
You made a profit of Rs. 2001 (Rs. 2,66,130 – Rs. 2,64,129) by trading only for a couple of hours.
This is just an example, the market can also behave opposite and you can lose most of your money if the share prices keep on decreasing.
Traders make money in falling markets by short-selling.
If stock price is falling then sell the shares at current price (without owning) and buy when the price is further down. For example, you sold the 100 shared of ITC at 200 Rs. at 10:00AM and buy ITC shares at 190 Rs. at 2:00PM. Your day profit is 10 Rs. per share, means 1000 Rs because you short traded 100 shares.
To catch the market trend, you should learn technical analysis that includes trading indicators like candlesticks, and chart patterns.
Technical analysis throws light on when to make an entry into the market and when to take the exit call.
You can start stock trading in four ways once you have learned technical analysis.
4 Types of Stock Trading
When a trader trades for a few seconds or a few minutes to encash the smallest market movement, that’s called Scalp trading or scalping.
Traders usually invest a significant amount of money to gain from a small fluctuation in the stock price.
#2. Day trading
You do day trading when you buy stocks in the morning but sell them before the market closes. The basic motive is to capitalize on the bullish market trend that happened because of any important news or economic event.
#3. Swing trading
In swing trading, traders buy stocks for multiple days or weeks and book profit from that upward movement of the shares.
#4. Position trading
When you buy a stock and hold it for a couple of months, you are doing position trading. In position trading, the risk of money loss is reduced as you have a long time horizon to recover from the sudden stock market fluctuations.
What is Investing (or Value Investing)
Investing is a way of gradually building wealth over an extended time period by buying and holding a portfolio of stocks/mutual funds, bonds, and other investment instruments.
These investments are usually held for years, or even decades, taking benefits from perks like dividends and share splits.
The markets keep on fluctuating, but the investors will survive the downfalls with an expectation that prices will bounce back and the losses will be recovered.
An investor is more concerned with the company’s fundamentals, such as price-to-earnings ratios and management forecasts than market trends.
Difference Between Trading And Investing
|Buying stocks for a short time and encashing the price fluctuation in the market.|
It is like a One-day or T-20 cricket match
|Buying stocks for the long term and letting the funds grow over time.|
It’s like a Cricket test match.
|High-risk involved because a trader tries to make a profit from the market trend which is highly unpredictable.||The low risk is involved since an investor avoids making quick decisions if the market is volatile.|
|You must know the technical analysis to understand market trends and make strategies to capitalize on the price volatility.||You must know the fundamental analysis of stocks or companies to invest in the right stock.|
|Technical analysis involves analyzing the charts, graphs, and past price movements.||Fundamental analysis requires investigating a company’s account statements, different key ratios, cash flows, sales consistency, dividends, and future growth prospects.|
|You have to make a call after analyzing chart patterns to pick the market trend.||You have to make a call after analyzing the growth prospects of a company.|
|Regular efforts are required to analyze the market movement||Only initial efforts are required to do the stock selection, and fewer efforts thereafter to keep track of the investment.|
Which is Ideal for You (Investing or Trading)
Trading seems to be a thrilling way to earn quick money. However, it can also lead to big losses. If you are comfortable with the risks, trading with a small portion of your money is good to go.
But if you’re saving for a financial goal like building a retirement corpus and want to minimize exposure to volatility, then you should stick with long-term value investing.