Today, several people want to try their hand at the stock market and become traders or investors. The first step prospective traders or investors may take in their journey is to open a demat account. This is essential for any ongoing investing or trading activity.
Furthermore, individuals who wish to trade or invest may want to do so to make profits from their trading and investing activities.
Both trading and investing are methods through which people aim to profit in the financial markets. So, here’s a question: trading vs investing, is there any difference? The answer is “yes” so let’s find out more.
About Trading and Investing
A debate has always occurred between analysts and market participants about trading vs investing. This often sparks confusion in a layperson and some traders and investors too. Both traders and investors participate in financial methods but the difference between them lies in how they attempt to make profits.
In general, investors who carry out investing, aim for larger returns over extended periods through buying assets and holding them.
In contrast, traders take advantage of both rising and falling markets to enter positions and exit them over a shorter time frame. They tend to take smaller and more frequent profits. To know about trading vs investing, it is important to understand the concepts individually.
Understanding Investing
The goal of investing is to build wealth slowly, over an extended time span. This is done by buying an asset or a portfolio of assets and holding it. This can comprise stocks, mutual funds, baskets of stocks, bonds, ETFs (exchange-traded funds), and other investment instruments.
Commonly, investments are held for years, and sometimes decades, taking advantage of perks such as dividends, stock splits, and interest along the way.
While markets inevitably tend to fluctuate, investors ride out the downturns with the expectation that asset prices will eventually rebound and any losses will be recovered.
Investors focus on market fundamentals more, like management forecasts and price-to-earnings (P/E) ratios to foretell the long-term profitability of any asset.
The Concept of Trading
A trader begins the path of trading activity by open trading account. This is linked to a bank account and facilitates the seamless transaction of trading.
As a method of making profits in financial markets, trading may be viewed as involving more frequent transactions like the purchasing and selling of stocks, currency pairs, commodities, or any other financial instruments.
The goal is to generate quick returns, sometimes within a day (as day traders attempt). While investors may be satisfied with an annual return of 10%-15% each year, traders may want this each month.
Trading vs Investing – Differences
By now, the main difference between trading and investing may be clear, but there are key differences dealing with various parameters of the two methods of making profits:
1. Style/Approach
Investment styles involve passive investing and active investing. Active investors constantly monitor their portfolios and make changes, even though they do this for the long term. Passive investors typically buy assets and hold them, without actively engaging in their investment, over long periods until a profit is realised.
Traders use many trading styles after they have opened a trading account and start trading. There are day trading styles to make profits within a single trading day, swing trading styles that involve positions being held for days or weeks, scalp trading where positions are held from seconds to minutes, and position trading in which positions may be held for months.
Traders essentially opt for a trading style based on the amount of time dedicated to trading, the account size, the level of trading experience, the trader’s personality, and the trader’s risk tolerance.
2. Risk Profile
You may surmise that investment is a less risky prospect as you buy and hold an asset for a long period, tiding over market risks and ultimately achieving profits. On the other hand, trading may be perceived as more risky as trades must be closed faster and happen frequently too.
3. Time Horizon & Loss Potential
The length of time that assets are held in trading vs investing differs significantly. Investing deals with longer time horizons for which assets are held, while trading involves short holding periods.
The potential for loss is among the main differences between trading and investing. There is a risk of losing money regardless of whether it is held for the long term or a short while.
However, the risk is enhanced for traders for many reasons. They tend to hold assets for a shorter period and they are also prone to holding a diverse group of assets—those that investors may not necessarily have in their portfolios, such as futures and swaps.
Which is Better, Trading or Investing?
Now that trading vs investing has been discussed, you may want to know which of the two is better, that is, more profitable.
There’s no simple answer – it depends on you and your individual financial situation and goals.
Traders are also more risk-tolerant, so they don’t get distracted by dips in the market or get affected by losses. Investing is potentially for people who are more risk-averse and have capital preservation on their minds.
What’s Best for You?
Trading, unlike investing, requires a great deal of effort, time, understanding of financial markets, and diligent research. Several traders are savvy and experienced and have a robust sense of how the markets work.
While investors may also be knowledgeable and experienced, a great many may not be. As such, they tend to rely on the professional expertise of financial analysts and experts.
