What Is The Difference Between Trading And Investing In Share Market?
Difference Between Trading And Investing
Investing and trading are two different paths toward the stock market with their own benefits and risks. Investing is all about long-term value at minimised risk and trading focuses on capitalising on the market momentum for quick gain.
Investing Basics
- Investing refers to putting money into financial securities over a long timeline, like equities, bonds, mutual funds, exchange-traded funds, etc. Some investors may even hold their investments for decades.
- Investors expect to rise in asset value over a duration and primarily build wealth through capital appreciation.
- Investing reduces the risk mainly by mitigating the effects of unexpected changes in the market. The longer the time horizon, the lower the risk that you could make a loss on an investment.
- Diversification of investments is important for investors. Investors can consider mutual funds for instant diversification as a single investment holds numerous different securities.
- Investors need to open demat account to hold their financial assets and investments.
Trading Basics
- Stock trading involves buying and selling financial securities in a short period by individuals intending to make quick profits.
- Traders hold securities for a few minutes, days, or weeks. Risk tolerance is the primary concern for traders.
- Even if a stock price is expected to rise more than the target price over the next few days, traders tend to exit the position.
- Trading involves a lot of speculation that requires quick decisions. Trading is a risky bet for most individuals. If your trade goes against you, you may have to bear losses.
- If it is a leveraged trade, your losses may be intolerable. Margin trading and short selling are two ways of leveraged trading.
- Traders need a Demat and trading account for smooth online trading.
What are the Demat account and trading account? – A Demat account is an online storage for your digital securities and a trading account is a trading platform to connect you to stock exchanges and place trade orders.
Stock Analysing and Trade Techniques
Investors typically look at the intrinsic and fundamental values of a company, like, earnings, history, price-to-earning (P/E ratio), or future growth prospects. On the other hand, traders rely heavily on technical analysis based on market movements.
Traders need to be more skilled and knowledgeable than investors. They make trading decisions based on technical analysis. They need to be more proficient at reading charts as no one can accurately predict every market direction. If you are interested in trying your hand at trading, prefer to take position positions and avoid spending a large amount. Traders need to set a stop-loss order to execute the trade at the set price if the asset drops after a certain price. It will limit your losses.
Types and Positions
Investing
- Value Investing: Investors determine if the stock is undervalued. They focus on the stocks of well-established companies only and maintaining the value of the investment.
- Growth Investing: Investors look for opportunities to enjoy significant capital appreciation over time. They prefer stocks with higher growth potential, even if it increases the risk quotient.
Trading
- Day Trading: The most common trading style is day trading. Day trading involves trading securities within the same trading session and they never hold the securities overnight.
- Swing Trading: Swing trading means investing in securities that traders expect will rise in value over days or weeks.
- Scalp Trading: Traders make the gain from the tiniest opportunity and buy and sell stock within a few seconds or a few minutes.
Thus, both investors and traders seek remarkable profits through market participation. You can choose between the two based on how long you are willing to hold a position in the market (time horizon) and your risk tolerance. If the timeline allows market participants, investing can yield much higher returns.
