Investing And Trading: What Sets Them Apart?
Last Updated: Jan - 10- 2020
Investing and trading are two proven approaches to wealth creation. On the surface, these approaches seem to have some overlap. Both require participation in stock markets. Plus, roles in investing and trading are often interchangeable. A trader at times behaves like an investor, and an investor like a trader to maximize profits and mitigate risks. But, differences surface once you dig deeper. Read on to know why investing and trading are no two peas in a pod.
Investing is all about patience. You identify quality stocks, invest in them and wait for years for maturity. As Warren Buffet puts it, “our holding period is forever”. In investment, temporary market fluctuations even to the tune of 20% are immaterial. As an investor, you can always ride the highs and lows of a market cycle for significant monetary gains in the long term.
Conversely, trading involves short holding periods. You stick to stock only until favourable price movements are visible. Once they arrive, you dispose of the stocks to generate profits, instantly. The short-term market fluctuations largely decide your trading decisions.
Wealth creation is the bottom line in both, investing and trading. However, the approach differs drastically. While investors prefer building fortunes via dividends, traders show an inclination for profits. An investor researches the market for stocks and buys them cheap. Now, he/she lets the stock prices apreciate over time and dividends flow in at regular intervals.
On the other hand, traders monitor price movements to stay profitable. When prices are high, they sell their stocks. So, dividends are pushed out of context. In trading, profits invariably depend on the time a trader chooses to enter or exit a given stock. Plus, traders often look to maximize their trade frequency to rake in profits more frequently.
As the best stock brokers in India will attest to, the financial market is vulnerable to risks. Accordingly, the risk reflects in both approaches, not in the same intensity, though. The risk runs comparatively deeper in trading. That’s due to consistent market fluctuations perpetrated by speculations, expectations, policy initiatives, short term emotions and the market forces of demand and supply.
Traders often find it hard to constantly adjust to a highly volatile market. Contrarily, investors can breathe a sigh of relief, as their investment is hedged against the vagaries of daily market cycles. Historically, stocks gave good returns for longer holding periods.
The strategy is a major distinguishing factor when comparing investing and trading. Investors tend to invest in a company fundamentals and its growth potential over a period. That calls for extensive research on the company’s financial aspects, top management, its performance, policy changes, long term global trends, and whatnot. Only upon factoring all this, investors arrive on educated strategic decisions.
However, traders prefer skipping the fundamentals. Instead, they focus more on technical analysis. For them, monitoring the performance of a stock in a given period is the key for profitable trading decisions. That’s followed by tracking market conditions, price trends and chart patterns. Traders use Charting software and other technical tools.
Trading is a high-frequency proposition. A trader might make more than 10 trades a day. On the contrary, investing happens only once in a while. Typically, an investor disposes of his stock once or twice a year or once in several years. Note that, each transaction comes with a certain fee. Thus, the frequency of buying and selling stocks determines the costs involved. The more the frequency, the higher the cost will be. Thus, a trader incurs more expenses vis-à-vis an investor.
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