Investing vs Trading This question, which should be started first, comes to the mind of more or less everyone, especially the beginners in the stock market. Today we will discuss in detail how a person can start their financial journey and how to be successful in the stock market.
Difference Between Investing vs Trading
Understanding investing vs trading in the financial market is crucial as it facilitates all stock market activities. If you want to work in the stock market, first of all, you need to know about the risks. If you know which one is more risky or which one is less risky, you can make the right decision easily.
What is Investing?
Investing means in various assets such as stocks, bonds, mutual funds, gold, real estate, Treasury bills, etc. Investors usually invest long-term or short-term with the aim of earning passive income with low risk. However long-term investments are considered to be the most profitable.
- Long-Term Investing: Generally, investing for 5 years or more is called long-term investing. To make this investment, it is necessary to conduct a fundamental analysis of the company’s growth potential, company business, market trends, etc. The main purpose of long-term investment is to gradually increase wealth, generate passive income through dividends, pay less tax or charge, take less financial risk, and earn a lot of money in the long term through compound interest.
- Short-Term Investing: Investing from one day to one week, one month, or two years is generally called short-term investing. To make this investment, it is necessary to know about technical analysis, market movement, technical indicators, and price movement. The main objective of short-term investing is to earn more money in less time.
Investing is generally divided into three categories, such as:
- Value Investing: Investors first look for many undervalued stocks to make this investment, that is, some companies whose business is good. Even after the company’s management is good, that company is trading at a much lower price than other companies in its industry, and the stock price is temporarily undervalued for some reason. there is Investing in the shares of these companies is done after selecting some of the stocks and determining how much they should be worth in the future. Then, when the share reaches its fair value, investors sell the shares.
- Growth Investing: Even though the company’s shares are already overvalued, investors looking at the company’s strong business, financial results, and future growth to invest in those shares is called growth investing. This type of investment involves a lot of financial risk, sometimes huge profits, and sometimes huge losses.
- Dividend/Passive Income Investing: Investors invest in various stocks or bonds to earn dividend income; this is also called passive income.
Advantages of Investing
- Lower Risk: The risk in investing is much lower than in trading.
- Lower Charge: Investing charges less than trading.
- Tax Benefit: If you invest for the long term, it takes less tax.
- Regular Income Generation: If you invest in shares, it is possible to generate dividends from them, and if you invest in bonds, you can generate interest income from them.
- Compound Interest: If you invest a small amount of money every month for the long term, after some years that money will turn into a large amount of money through compound interest.
- High Return Potential: A lot of money can be earned by investing with low risk. Which gives a much higher return than bank FD or RD.
- Risk and Reward Ratio: The risk and reward ratio is better in long-term investment as compared to trading, i.e., the risk on the invested money is less and the reward can be much higher. But in the case of trading, the risk is high and the reward is low.
Disadvantages of Investing
- Market Volatility Risk: The share market goes up and down evenly, but if the market is volatile for some reason, the investment can go to a loss at that moment.
- Economy Factors/War: After investing, if there is a war situation in your own country or any other country, or if there is a political change or some other event in your country, the full impact of it will increase the tendency of losses in the stock market at that time, and even portfolio losses may be seen.
- Research and Fundamental Analysis: To invest successfully, you need to know fundamental analysis, including market research, company research, company management, business, and profit growth. If you invest without knowing all these things properly, the tendency to lose is very high.
- Time and Patience: Time plays the biggest role in investing. Investing at the right time and being patient after investing is very useful because investing needs time and patience. If these two things are not followed properly, there can be a big loss.
- Government Policy: If the government suddenly introduces a new policy or changes the rules and regulations of the old policy, its impact on the stock market may result in a loss of investment.
What is Trading?
Trading means buying and selling various financial securities, such as stocks, currencies, commodities, derivatives, etc. The main purpose of trading is to earn more money in a very short time. The time frame of this trading can be a few seconds, a minute, an hour, a week, or even a month. Traders keep an eye on market movement, price movement, market emotion, volume, put call ratio, global news, market fluctuations, government/SEBI (Securities and Exchange Board of India) new rules, regulations, or any announcement for trading. Trading is usually of many types, like position trading, momentum trading, algorithmic/software base trading, and breakout trading, but here we will discuss three of the most famous:
- Intraday Trading: The buying and selling of various financial securities between the opening and closing times of the stock market is called intraday trading.
- Swing Trading: To do this trading, after doing a fundamental analysis and technical analysis of a company or securities, trading is done by looking at support and resistance. When the price reaches support, it is bought, and when the price reaches resistance, it is sold. This trading can last from one day to a week, a month, or more.
- Scalping: Scalping is a part of trading. It is done for a very short period of time. Once the trading setup is made in the middle of small price movements, the entry is made in a few seconds, some profit or loss is booked, and the exit is made immediately. This trading usually lasts from a few seconds to a few minutes.
Intraday Trading, Swing Trading and Scalping Some Pros and Cons
Pros & Cons | Intraday Trading | Swing Trading | Scalping |
Risk | High Risk | Medium Risk | Very High Risk |
Stressful | High Stressful | Moderate Stress | Extremely High Stressful |
OverNight Risk | No | Yes | No |
Time Frame | Within a Single Trading Day | Several Days to Weeks | Seconds to a Few Minutes |
Advance Skill Required | Yes | Yes | Yes |
Quick Profit or Loss | Yes | No | Yes |
Transaction Costs | High | Low | Very High |
Quick Decision-Making Skill Required | Yes | No | Yes |
Before Trading, Plan Entry-Exit Required | Yes | Yes | Yes |
Risk Management Required | Yes | Yes | Yes |
Psychological Control Required | Yes | Yes | Yes |
Risk-Reward Ratio Target | 2:1 or Higher | 3:1 or Higher | 1:1 or Some Higher |
Advantages of Trading:
- Quick Profit: Through trading, it is possible to earn a lot of money in a very short time.
- Trading Time: The Indian stock market is open from 9:15 a.m. to 3:30 p.m., and all trading is done during that time, i.e., there is time flexibility. Some do this trading full-time, and some do it part-time.
- Liquidity: Trading is usually done where there is liquidity, as a result of which entry or exit is possible very easily. Both buyers and sellers are almost equal.
- Multiple Options: Currently, there are multiple options for trading, such as intraday trading, stock trading, futures and options trading, currency trading, scalping, forex trading, commodities trading, etc.
- Learning: Through trading, how the entire financial market works, including the share market, how the global share market works, and much other new information can be learned and known at the same time, which makes the path to success in trading easier.
Disadvantages of Trading:
- High Risk of Loss: There is a high risk in trading where if there is a little mistake or an unexpected event happens in the market, the entire capital can be zero in an instant, i.e., you can lose all your money.
- Time: Trading can never be learned in a day. To become a successful trader, it is very important to know, learn, and spend time in the market. It may take some years to learn to trade. Trading requires time and experience.
- Emotion: One of the main reasons for losing in trading is that traders make huge losses during trading due to greed when they gain emotion, fear, or overconfidence when they lose.
- Over Trading: After making a profit in a trade, taking a loss with another trade and taking another trade to recover that loss continues in this way, and finally, the entire capital is used up in one day. So never over-trading should be done.
- Knowledge and skill: These two things are very important for trading because most of the people in the stock market do not know how to trade when to take risks, and start trading only out of greed or hearing from people. As a result, they have to face huge losses. Trading is a skill, so it doesn’t come in a day; it takes years to build.
- High Stress: Trading has high stress compared to investing. So before starting trading, you should make yourself mentally strong and ready to bear the pressure.
- Transaction Charge: If you trade repeatedly or start trading with less money, you have to pay many different charges, like brokerage, government tax, SEBI tax, stamp duty, etc. This results in less or no profit but more loss.
Conclusion
Investing vs trading has been discussed in detail here, and a beginner can decide which one to select after reading it well. Which one should start investing or trading depends on the person himself: whether he will take a risk or not, how much risk he will take, how much trading capital, whether he can bear stress or not, etc. Factors work. But whatever you start between investing and trading, you can start only if you learn well first, know books, practice, and know how the stock market works.
Disclaimer
All the information investing vs trading discussed here is for information only, and we do not encourage anyone to trade or invest in any way. Please do not start investing or trading after our article, as it may result in your profit or loss, and we are not responsible in any way. Consult your financial advisor before starting an investment or trading.