Trading and investing share the same end goal — making money. But their differences set in when you draw your attention to the nature of the risks involved.
Both wall street and the stock market are marred with misleading stereotypes.
- Trading is the short-term buying and selling of financial assets, aiming to profit from market fluctuations while investing focuses on long-term wealth accumulation.
- Traders capitalize on short-term market trends and price changes, whereas investors seek to grow their wealth through dividends, interest, and capital appreciation.
- Investing is less risky and more stable than trading, which can yield higher returns but involves higher risks and more frequent transactions.
Trading vs Investing
Trading means buying and selling securities or assets in the short term while investing refers to buying and holding securities or assets for the long term. Trading is more speculative and focuses on short-term gains while investing focuses on long-term growth.
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Risk is high in trading, while the risk is comparatively low in investing.
So before you rush into concluding anything, you must familiarize yourself with the basics, which include understanding the difference between investing and trading at the fundamental level.
|Parameter of Comparison||Trading||Investing|
|Period||Holds stock for a shorter period.||Holds stock for years, decades, or even longer.|
|Capital Growth||Focuses on the price movement of stocks. If prices shoot, they sell their stock and buy them when they fall.||Focuses on creating wealth by compounding dividends and interest over the years after holding on to quality stock.|
|Strategy||Buy to sell||Buy to hold|
|Tools||Technical analysis of oscillators and moving averages||Market Fundamentals|
|Return||On Average, 10% Return each month||On Average, 10 to 15% Return each Year|
What is Trading?
Trading is more centered on making short-term profits. It doesn’t care about the long-term health of a company or what it does. It’s instead more concerned about predicting the price in the short term for raking in quick profits.
Traders spend most of their time analyzing trends and observing patterns as they collect insights and use them to buy and sell stocks for short-timed profits. Traders also happen to have their unique way of minimizing losses.
For instance, they can adjust risks with tactics such as stop-loss (cutting losses when stocks fall beyond a specific price point) or short-selling (selling borrowed stocks in the hopes of repurchasing them when the price drops).
What is Investing?
Investing, on the other hand, is more focused on the big picture. They have a buy-and-hold philosophy that they use to build their wealth gradually.
So basically, traders buy stocks that they believe may be undervalued or those of companies with solid financial fundamentals.
They’ll then hold on to these stocks for years, hoping their value will grow and make colossal profits in the long run.
It’s, therefore, safe to say that they’re more concerned about the long-term health of the companies they invest in.
Investors bank on variations in the stock market. They also have a way of re-balancing their portfolio to align them with their ever-changing life goals. And lastly, investors are masters of diversifying risks.
Main Differences Between Trading or Investing
1) How much of this time are you willing to commit to the activity?
If you have enough time to read graphs and charts daily, then simple logic demands that you try trading. But if your regular time is somewhat limited, you’re better off investing.
2) How far are you willing to go with research? Trading requires an extensive amount of research as opposed to investing.
It would be best to dedicate ample time to analyzing company growth, financial statements, financial projections, and history.
In other words, you must be willing to put in the hours and do religious research and analysis on the fundamentals and technical aspects of trading.
So unless you have this time and the determination to drive you, you might want to consider investing instead of trading.
3) How much are you willing to put in? Your investment size and goals significantly determine the direction to take.
If your investment is somewhat limited, you’re better off investing long-term.
However, if your investment is large enough, you have better chances of making the most out of your investment if you opt for short-term investments or trading.
The problem with Juggling Both
You may be tempted to juggle both. But before you decide to proceed with this decision, there are things you might want to find out beforehand.
Here’s the thing: no plan is foolproof. You may choose to invest, but that comes with no guarantees.
At this point, you may also be tempted to try your luck in trading — and that’s where people sometimes go wrong.
First, you must understand that trading and investing don’t operate similarly. The strategy you applied in trading and thus succeeded will certainly not work when making a long-term investment.
Assuming you’ve decided to make a short-term investment. But in an unfortunate turn of events, the price of stocks plummets.
As a trader, you’ll always have a way to circumvent the small losses and prevent them from growing into something big.
Also, you’re not emotionally attached to the stock as a trader. So you should be able to know when to get rid of the losses at the right time.
However, juggling both may make it hard to resist the temptation of holding onto your stock and not giving up on it.
So you have a trader who is unpracticed when investing, with little to no information on the company they’re investing in, to decide on the stock to hold on to or let go.
For a trader doubling as an investor, odds are the bulk of the decisions you’ll be making will be wild guesses.
The same goes for an investor who thinks they can trade. From what we know, you’re not supposed to sell off your stock when prices fall, but you have some deep knowledge about the fundamentals that make you hold on to your stock regardless of what happens.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.