When it comes to participating in the equity market, investing and trading are the two genres of the field. However, investing and trading are very different approaches to generating profits in the financial market.
What is Investing?
Investing is traditionally related to buying stocks or any financial instruments that can fetch returns over a long period. Thus, investing involves thorough fundamental research about the asset for potential investment targets.
An investor aims to create a balanced portfolio of different stocks that give returns through an appreciation in value as well as dividends. This enables an investor to attain financial security.
Usually, investors do not sell their holdings regularly. It is only in case of an emergency or when the stock has met its long-term targets.
What is Trading?
Trading is associated with buying and selling stocks or any other financial instruments over shorter periods. This is primarily to make profits from the short-term movements in prices of these securities. So, traders essentially take advantage of volatility by speculating.
Assessing good trading opportunities typically makes use of trading systems or chart-based techniques to know short-term patterns and this technique is called technical analysis. It involves more frequent buying and selling of stocks or other financial instruments for quick gain.
Difference between Investing and Trading :
Duration :
Trading is a method of holding stocks for a short period. It could be for a day or a week. A trader holds stocks till the short-term price appreciation, whereas, investing is an approach that works on the buy and hold principle. Investors invest their money for long-term say, some years, decades, or even longer periods. Short-term market fluctuations are insignificant in the long-running investing approach.
Capital appreciation :
Traders look at the price movement of stocks in the market. If the price goes higher, traders may sell the stocks.
Simply, trading is the skill of timing the market whereas investing is an art of creating wealth by compounding interest and dividend over the years by holding quality stocks in the market for a longer duration.
Risk :
As you are aware, both trading and investing imply risk on the capital. However, trading comparatively involves higher risk and higher potential returns as the price might go high or low in a shorter duration.
Since investing is an art, it takes a while to develop. It involves comparatively lower risk and lower returns in the short run but might deliver higher returns by compounding interests and dividends if held for a longer period.
Daily market cycles do not affect much on quality stock investments for a longer time.
Profits or Loss:
Traders put money in a stock for the short term. They buy and sell fast to hit the higher profits in the market. Missing the right time may lead to loss. They look at the present performance of the companies to hit the higher price and book profits in short term. Profit and loss vary depending on the risk appetite.
Investors keep themselves away from the trends and invest in value. They invest for a longer period keeping an eye on the stocks they hold. They patiently wait till the stock reaches its potential that will fetch good profits and less loss.
