Difference between Trading vs. Investing

Trading vs. Investing: Know the difference

When it comes to making money in equity market, trading and investing are the two genres of the market. Many, people think that investing and trading are used interchangeably, but in reality they are very different approaches of making money or creating profits in the financial market.

Let’s understand this with an example, say you and your brother bought same amount of seeds to sow in your fields but you sold them to a friend because you were able to make profit. And your brothers owed the seeds and let them grow for a year till they produced new seeds. He sowed the new seeds and continued doing same for a few years and sold a lot more seeds eventually than he bought. By investing his seeds he would have made profit a lot different than what you earned by trading your seeds.This is simply the difference in investing and trading.

Trading in Share Market

Trading is a short term activity. Trading means buying something ata low price and selling it for a higher price to earn profit. The key factor that distinguishes trading from investing is the span of time you hold on to the assets.

A trader always focuses on short-term fluctuations in prices, because he will even out them in the long run. Traders take on “buy and sell” approach.

Investing in Share Market

Investing is the practical use of money to make more money, or in other words, you put your money to work to make more money. When investing, say in gold, real estate or shares, the basic idea is to sell it at a future date when the value of these assets increases.

An asset can include anything frombonds to mutual funds, stocks, gold coins, real estate or other intellectual property. Good investments are the best way of making more money but can take time, probably even years, to work out because there are many uncertainties. Investors take on “buy and hold” approach.

5 main differences between Trading vs. Investing

  • Period

Trading is a technique of holding stocks for a short duration of time. It could be for a day or a week. Traders hold stocks till the short term higher performance, while, investing works on the concept of buy and hold. Investors invest their money for a few years, decades or for even longer time span. Short term fluctuations are unimportant in the long running investing approach.

  • Risk

Without a doubt, both trading and investing are risky. However, when two are compared, trading is slightly riskier, but it also involves higher potential returns as the price might go high or low in a short time. As investing is an art you need time and practice to develop it. It involves lower risk and lower returns in a short period but might deliver higher returns by compounding interests and dividends if held for a longer time. Quality stock investments are not affected much by daily market cycles for a longer time.

  • Capital Growth

Traders look at the price fluctuations of stocks in the market. If the price increases, traders may sell the stocks. In simple words, trading is a skill of timing the market, while investing is an art of producing wealth by compounding interest and dividend over the years by holding valuable stocks in the market.

  • The ones who do

Traders put money in a stock for a short time. They buy and sell fast to make higher profits in the market. Missing the right time may lead to loss. Depending on the present performance of the company, the traders place the trade to hit the higher price and book profits in short term. Investors, on the other hand, don’t follow the trends and invest in value. They invest for a longer period of time keeping track of the stock they hold. They wait patiently for the stock to reach its potential. The ones who are able to reach their financial goals are successful.

  • Skill vs. Art

Trading is like one day cricket match while investing is like test cricket. You would watch skilled player in the team who are expected to hit fours and sixes to score higher in a one day match. Whereas, it is the test match where you get to see the art of the game. In the same way, traders are skilled, technical people who time the market and learn market trends to make higher profits in a particular span. It is related to the psychology of the market. Investors, on the other hand, analyze the stocks they want to invest in. For investing, one has to learn business fundamentals and commitments. It is related to the philosophy that runs the business.

So, now it is up to you to decide if trading in Share Market the seeds at a higher price now to make a smaller profit is your aim or you want to hold on and grow more seeds to sell at a higher cost in the long run is your goal.