Difference between Investing and Trading
Investing and trading are two different methods of making money in the financial markets. There is a thin line between investing and trading. Let us see how investing differs from trading!
Investing:
It refers to gradually building wealth over an extended period of time by investing in a portfolio of stocks, a basket of stocks, mutual funds etc. It does not involve frequently buying and selling of stocks, commodities etc. The investment is held for a long period of time and the investor usually expects a 15-20% profit in a year. People who usually remain busy prefer investing than trading as in trading one need to spend the entire day to track the price movement of the stocks.
Investors generally invest in the stocks of quality companies with bright futures, and they don?t need to focus on the intraday price movement of the stocks, rather they are more concerned about the long-term price movement of the stocks.
Trading:
Trading refers to frequent buying and selling of stocks, commodities, currency pairs etc., in order to generate faster returns. In trading, the profits are generated by buying shares or commodities at a lower price and selling them at a higher price within a short period of time, on the same day or within few days or weeks. In trading, a trader’s intention is to earn more profit in a short period of time, around 10-15% profit in each month. To be a successful trader you are required to have a sound knowledge of market trends and how it works.
Traders often use technical tools, like moving averages and stochastic oscillators, to know about the high-profitability setups. The trading style of a trader is based on various factors like amount invested, amount of time devoted to trading, trading experience, risk tolerance and personality.
In an organized stock exchange like BSE, NSE only registered members are eligible for trading. The registered brokerage firms provide services to individual traders and charge a certain amount as commission for their services.
Some of the key differences between Investing and Trading based on the above information are as follows:
| Investing | Trading |
|---|---|
| It refers to gradually building wealth over a long period of time by investing in stocks, commodities etc. | It refers to frequent buying or selling of stocks, commodities etc., in order to earn a profit in a short period of time. |
| Investors are usually content with a 10 to 15% annual return. | Traders usually seek around 10% return each month. |
| Stocks are held for a long period of time, e.g. one or more years. | Stocks are held for a short period of time, e.g. for one day, few days or weeks etc. |
| It is the skill of creating wealth through dividends and compound interest by holding stocks for a longer duration. | Traders keep tracking the price movement of the stocks if price increases they may sell the stocks if the price falls they may buy more stocks. |
| It involves comparatively less risk than trading. | It involves more risk than investing as price may go high or low in a short while. |
| Higher returns are possible after a long period of time. | Higher returns are possible in a short time. |
| It relies on fundamental analysis for investing in stocks. | It involves technical analysis for buying stocks. |
| Continuous tracking of stock is not required. | Continuous tracking of stocks is required. |
| The capital gains are not taxed if the investor holds the investment for more than a year. | The short-term capital gains are taxed at around 15%. |