People do actions of BUY-SELL in financial market. There are two ways by which you can earn money in the financial market either by Trading or Investing. There is absolutely nothing wrong with trading or investing. What are these terms about, it is worth to know so that decision can be made accordingly. People who are relatively new often tend to get confused and they mistake Trading as Investing. In reality, these are two different approaches to generate income form the stock market. Appropriate knowledge of the two helps you make a better choice, minimize risks and increase the profit earning prospects.
Let’s first look at the meaning of both the terms:
Meaning of Trading
Trading is all about buying and selling of shares in the market on daily basis or frequent basis in short term. It is a way to earn quick profits by buying stocks and selling them off the same day or the day after. They can do both buying-selling or short selling-buying trades to make profits. Traders always buy stocks at a lower price and sell them when the price shoots up and vice versa. Stop-loss orders are used as safety measure by traders to protect them from incurring heavy losses. It is just like local travelling, which is more frequent.
Meaning of Investing
Investing means buying of stocks and holding on to them for a longer period of time. The investment can be for years or even decades. It is done with a purpose to earn rich dividends annually and reinvesting the earned profits into additional stocks of shares. The daily market upheaval does not make much of a difference to long term investors. It is like long journey, where hours or daily stay won’t make to close the journey.
Difference between Trading and Investing
1. Purpose – The purpose of both Trading and Investing is obviously to earn profit. But the key difference with Trading is that it is done to get an immediate return through daily/frequent buying-selling or short selling-buying of stocks while the purpose of Investing is to build wealth through capital growth and rich dividends in the long run. This is participation in economical growth of nation and company in longer run.
2. Period – More often than not, a trader sells his stocks the very same day he buys (intraday trading), the moment the price of the stocks increases. In some cases, he holds his buys for a day or maximum for a week. Trader can short sell the stock and buy at lower price to make profit also. An investor buys stocks and holds them for 3 years or 5 years or decades.
3. Return – Return is broad term; successful trader can earn handsome profit of 10-15% or more monthly. The associated risk is also high. While return on successful investing is moderate annually (10-15%).
4. Risk – Compared to Investing, risks run high in Trading as it is aimed at earning higher profits at a short time. But setting a stop-loss order minimizes the risk of Trading losses to a great extent. Investing involves low risk. So the return is relatively low, but in this also investor need to check their investments to continue or book profits. It is like running at higher speed will high probability of accidents.
5. Protection – A trader often protects his trading capital by setting stop-loss. When the unexpected happens and the market crashes, the stop-loss orders automatically sell the stocks at the pre-decided price. Thus it protect traders from suffering a huge loss. Investors need to wait and watch in case of a crisis and need to check the situation/data to take decision for continue or exiting the investment. Exiting philosophy for both trader and investing is same, only time frame is more for investing.
Having known the differences, you need to make a choice for yourself whether you want to become a trader or an investor. At Profit and Stocks, we cover all aspect of intensive financial training programs for beginners as well as experienced on how to trade and invest. We suggest and help making trade plan/investment plan based on ones need and constraints. Behavioral aspect which affects the decision in financial market/ stock market is also key element in share market training.
Happy Trading/Investing 🙂