Trading vs Investing
The key difference between Trading and Investing lies in the fact that trading means to resale the goods for a price whereas investing means to invest money in some schemes, projects, plans for earning profit in the future.
Trading is for short term to medium term gain while investing is for medium-term to long term gain. Risk is high in trading while investing is comparatively low.
Trading and investing share the same end goal — making you 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 stereotypes that are misleading.
So before you rush into concluding anything, it’s important that you familiarize yourself with the basics, part of which includes understanding the difference between investing and trading at the fundamental level.
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 the bulk of their time analyzing trends and observing patterns, as they collect insights and use it to buy and sell stocks fort short-timed profits.
Traders also happen to have their own unique way of minimizing losses.
For instance, they can adjust risks with tactics such as stop-loss (cutting losses when the price of stocks falls beyond a certain price point) or short selling (selling borrowed stocks in the hopes of buying them again when the price drops).
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 in a gradual manner.
So basically, what traders do is buy stocks that they believe may be undervalued or stocks of companies that they believe hold solid financial fundamentals.
They’ll then hold on these stocks for years in the hopes that their value will grow and make them colossal amounts of 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 in an effort to align them with their ever-changing life goals. And lastly, investors are masters of diversifying risks.
Comparison Table Between Trading and Investing (in Tabular Form)
|Parameter of Comparison||Trading||Investing|
|Period||Holds stock for a shorter period of time.||Holds stock 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|
|– Price/earnings ratio|
|– Management Forecasts|
|Return||On Average, 10% Return each month||On Average, 10 to 15% Return each Year|
Main Differences Between Trading or Investing
By now you should have figured which between the two is right for you? But if someone was to advise you on the direction to take, what one should it be — trading or investing?
1) First, before you contemplate on the direction to take, take a moment to weigh on the amount of time you have on your hands. How much of this time are you willing to commit to the activity?
If you have enough time to dedicate to reading graphs and charts on a daily basis, then simple logic demands that you try a hand in trading. But if your regular time is somewhat limited, then 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.
You have to dedicate an ample amount of your time analyzing company growth, financial statements, financial projections, and history.
In other words, you have to be willing to put in the hours and do religious research and analysis on both the fundamentals and technical aspects of trading.
So unless you have this time on your hands, and the determination to drive you, then you might want to consider investing instead of trading.
3) How much are you willing to put in? The size of your investment and the goals you have to matter a great deal in determining the direction to take.
If your investment is somewhat limited, then you’re better off making a long-term investment.
However, if your investment is large enough, then you have better chances of making the most out of your investment if you opt for short term investments or trading.
How to Remember the Difference Between Trading and Investing
Time Needed : 2 minutes
Remembering the differences is very simple, just follow our mind mapping guide given below:
- Associate the first word with a thing or item which you see daily
For e.g.: Middle line in letter H for Horizontal
- Associate the second word with a thing or item which you see daily
For e.g.: The two lines in letter V for Vertical
- Recall the two words daily two times
During morning and evening bring up the two words in front of you and then recall the things that you had associated with each word.
- Repeat for 7 days
Repeating this process for a week will help you remember the difference between words for a long time
Frequently Asked Questions (FAQ) About Trading and Investing
- What is the Difference Between Day Trading and Long Term Investing?
Day Trading is the procedure of buying and selling stocks on the same day. It is also known as intraday trading as the trade occurs within the day during the market hours.
In simpler words, it can be termed as a form of very short-term trading. Long term trading, on the other hand, refers to buying and selling stocks over a span of several months or years.
- Is Day Trading Better than Swing Trading?
Day Trading is faster than swing trading because you get the results within a day. In swing trading, the trader retains the position for a few days before closing it.
In day trading, the profit margins may be limited because the positions held close before or by the end of the market hours.
In swing trading, the trader gets enough time to analyze the movement of the stock and accordingly plan the moves. In short, Swing trading is less risky but more time-consuming than day trading.
- What is the Success Rate of Day Traders?
The overall success rate of day traders is around 20% to 25%. The rate may vary depending on short-term market fluctuations and the psychology of the traders.
Since market values are based on buying and selling ratios it is assumed that the profit margin earned by a trader is a direct result of the loss margin suffered by other traders.
- Which is More Profitable Trading or Investing?
Trading is more volatile than investing and there is more scope for big short-term gains. However, the risk of losing money is also equally high.
Investment, on the other hand, is less volatile and is generally associated with buying of assets or instruments that are subject to low and stable profit margins.
Investments bring long-term gains and are subject to very low market risk when compared to trading activities.
- What is Investing vs. Trading Quotes?
• Investing is a long-term process and trading is a short-term activity.
• Investing is an art of wealth creation and trading is a skill of market timing.
• Investment is a low-risk venture and trading is a high-risk practice.
• Investing is all about market fundamentals and trading deals with market psychology.
• Investors rely on market potential and traders rely on intuition.
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 full proof. You may choose to invest, but still, that comes with no guarantees.
It’s at this point that you may be tempted to also try your luck in trading — and that’s where people sometimes go wrong.
First, you have to understand that trading and investing don’t operate in a similar fashion. The strategy you applied in trading and succeeded in it is certainly not going to work when it comes to 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, as a trader, you’re not attached emotionally to the stock. So you should be able to know when to get rid of the losses at the right time.
However, by juggling both, you may find 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 it comes to investing, with little to no information on the company they’re investing in to make an informed decision on the stock to hold on or let go.
For a trader that’s also 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 have some deep knowledge about the fundamentals that make you hold on to your stock regardless of what happens.
Learn More With the Help of Video
To sum up the difference: we can say traders focus on taking advantage of the ever-changing market conditions
In order to enter or exit the stock market over shorter periods of time, whereas investor focuses on larger returns made over a protracted stretch of time after holding on to a stock.
Word Cloud for Difference Between Trading and Investing
The following is a collection of the most used terms in this article on Trading and Investing. This should help in recalling related terms as used in this article at a later stage for you.