Difference between investing and trading
In the academic world, math and bio both are part of science.
But does being a part of something mean they are the same? Absolutely not.
Similarly, you can gain profit either by investing or by trading but both ways are different from each other.
One can invest or trade in different types of financial markets. But here we’re going to talk about the stock market as the term “trading” is something that people mainly use in the context of the stock market.
How they’re different from each other? We will discuss it later, but before let us discuss what investing and trading is.
What is Investing
Investing or Investment is a way of multiplying your money over an extended period through the buying and holding of stocks (mutual funds, bonds and other investment instruments).
By the term “extended period” we mean a year or a decade or more time than that.
So this capital which is invested by the investors during the public issues or in the secondary market act as the foundation capital for the company as the company operates the business from this money received. And this is how an investor contributes to the company’s growth.
Investors invest by keeping the long-term perspective in mind that they would get their ‘x’ amount of return, which should be a larger return, after this many years. So, they do not panic during the volatility of the market or in general the ups and downs which the company face in the market.
And to get the aforesaid ‘x’ amount of ROI and the no. of years in which they would get this expected return, investors do the fundamental analysis. Look this is just an analysis where the investors predict the future of the company by looking at its past performance in the financial statements.
During fundamental analysis, their main concern is, “which stock to buy?”
You know what a compounding effect is, it works for the investment done by the investors who hold that for a long period.
What is Trading
Trading is also a method or a way to multiply your money but here you do not believe in just a “buy and hold” strategy.
Here you do such things which are unusual for the investors in trading you could sell first and then you buy and whatever the profit margin you get is your instant return (i.e. short-selling).
Either by short selling or normal buy and sell mechanism, a trader just wants to create profit out of the trades which he/she does and that’s why they look for the stocks which could give them frequent returns, doesn’t matter the size of the profit which they get.
And to search for such stocks traders do the technical analysis and after selecting the stocks they look for the answer to the question, “when to buy/sell that stock?” by doing the same analysis where they’re predicting the future of the company’s stock by looking at the charts created based on company’s past performance.
Most of the time, traders earn profit during the ups and downs of the market or market volatility.
Like the investors, traders do not contribute to the company’s growth and they also do not care about its financial health as they’re choosing the stock of those companies to earn profit in the short-term.
As the traders keep their money in the company’s stock but not for such a long duration and that’s why the compounding effect doesn’t come into the picture when we talk about trading.
Difference between investing and trading
It refers to long-term buy-and-hold strategies that earn returns as investment grows
It is about buying and selling shares in short-intervals for profit, with a focus on daily trend of share prices
One who invests is known as 'investor'
One who trades is known as 'trader'
Investors hold their shares even in the ups and downs of market as they buy shares with long-term perspective
Traders seem ready to sell shares whenever they get opportunity to gain profit
Investors do fundamental analysis before picking stocks
Traders do technical analysis before picking stocks
Investors' main concern: which share to buy
Traders' main concern: when to buy/sell share
Investors seek larger returns over the extended period
Traders look for the stocks that can provide them small-but-frequent returns
Compounding effect works on invested capital
No compounding effect
Investors contribute in company's growth
Traders don't think about the company, they want to profit
To predict company's future, investors analyze company's financial statements
To predict future, traders analyze charts
Investment and trading, both are fantastic ways to generate money but here you need to show patience and your skilled work. Make sure that you’re free from any kind of emotion while investing or trading as greed or panic could affect your decisions during the trades.
By experiencing the market or by the lessons and teachings from others; you need to categorize yourself first either as an investor or as a trader.