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Trading v/s Investing
Jan 10, 2022
There are two types of people dealing in the Equity market, traders and investors. The names are often interchangeable. Many people believe traders and investors are the same.
But this is not so. There are some significant differences between them. Let us look at both of them to understand them in a better way.
What is trading?
Trading involves more frequent transactions, such as buying and selling stocks, commodities, currency, and other financial instruments. Trading involves participation in the financial markets, which works on a buy-and-hold strategy.
Trading is when two parties agree on the financial terms, but they perceive its value differently.
For example- Say Yogesh wants to buy Stock of Reliance with a Current Market Price of Rs. 950. So, when Yogesh buys Reliance @ Rs. 950, Mahesh sells at the same price. Hence, both of them have an agreed on the price, Rs. 950 but the buyer, Yogesh, values it higher than the seller, Mahesh, at that point of time.
What is investing?
It is an act of investing money or capital to an endeavor with the expectation of obtaining an additional income or profit. Investment is a general-purpose term for anything you buy with your money, hoping to increase value later.
For example, if you buy gold today for Rs. 100, and 10 years later, you can sell the same thing for Rs. 250, it means you “invested” Rs. 100 in gold and earned a “profit” of Rs. 150.
Investment v/s trading - Key Differences
1. Duration of stocks
Trading is a method where you buy and sell stocks for a short period. The duration of holding a stock could be a month, day or a week also.
(A trader keeps the holdings for a short term to get potential better returns.)
In contrast, investment is an approach that works on the buy-and-hold principle. Investors invest their money for a longer period, from being from a year to as long as you want to keep. Short-term market fluctuations are insignificant in the long-running investing approach.
2. Capital growth
Trading is something in which traders buy the stock looking particularly at the price and time. Traders may get potential profit from trading if Stock market is favourable.
Whereas investing is an unexpected potential capital gain in which dividends payments and stock splits are aspects of equities investment that may increase value of investments over time.
3. Risk
Trading involves risk because the price of a share goes up and down in a short span. The price is not constant; it keeps changing.
Whereas investing in particular sectors is a thought process exercise. It takes time to develop. The investment may give a lower returns for the short term. But, if the waiting time is long, it can provide higher returns. Investment is less of a risk because it remains with time and may generate gains.
4. Goal
The goal of trading involves getting potential profits over a short period of time. It may gradually turns into a potential profit which depends upon the market. The goal is to generate maximum returns that outperform the buy-and-hold strategy.
In contrast, investing is to build wealth over an extended period by buying and holding the investments of stocks, baskets of stocks, mutual funds, bonds, and other investment instruments.
5. Analysis
Trading is based on technical indicators, the psychology of the market, money management, risk-reward, corporate events, etc.
Whereas investing is based on fundamental analysis, checking the company's fundamentals, industry, economy, financials, market, competitors, etc.
6. Return on investment
In trading, the stock is bought basically to exploit the rise in its price by selling it with increased price and profiting from that.
Whereas, in investing, the stock is purchased and essentially held for a long time. In the case of investing, one of the return on investment is via dividends that may keep on increasing as profits are generated and distributed via more quantity of stock through splits, bonuses, and many more.
7. Focus
You buy a company’s shares intending to sell them quickly, possibly within minutes, and perhaps days. The focus is on the short-term volatility of the share price movement.
Whereas, when you invest in a company, you become a shareholder, focusing on making a potential profit from a long-term holding and chance of receiving a share of the company's profits through dividends.
Final words
It’s more of an assumption than a blunt distinction. On one side of the coin, people who are clearly on the trading side are traders, who are always ready to trade, and people who put on hoping to make money in a short duration.
On the other side of the coin, people who think with no intention of selling in short period of time are investors concerned with the long-term economic fundamentals.
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Frequently asked the questions:
Q: Is trading the same as investing?
A: Trading is buying and selling for short-term potential profit, focusing on share prices. Investing is about buying stocks for the long term.
Q: Which is more profitable - trading or investing?
A: Investing is a lot more cost-effective compared to trading.
Q: Is trading profitable?
A: It depends upon how to plan your own future. You can be ahead with correct knowledge and strategy and gains from the markets.
Q: What is the most critical Rule for Investing?
A: Never invest in a particular place that you can't afford to lose.
Axis Direct is a brand under which Axis Securities Limited offers its retail broking and investment services. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. This information is only for consumption by the client and such material should not be redistributed.Disclaimer & Statutory Information
Related Keyword
Investing
Mutual Funds
Stock Market
Bonds
Trading
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