The Difference between Investing and Trading

Investing and trading are two different types of dealing in the market although both are done with common objective of making profits. The major difference lies in the fundamentals of these methods.

In general, investing is the process of buying the securities and holding it for the longer term in order to gain good returns. Trading is making profit in short-term by buying and selling stocks at highs and lows on daily, weekly or monthly basis.

Below is the brief difference between investing and trading:

Investing

The goal of investing method is to build the wealth gradually over a long period of time. For this the investors buys the stocks and hold it for years or even decades and take advantage of price appreciation and dividend paid by the company.  Investors perform the fundamental research about the securities, study the potential growth prospects and then finalise the securities to invest in.

Investing operates on the general principle that the market fluctuation is inevitable and can be ride out in longer time.  Even the down trend of the market is temporary and price will bounce back to its original valuations. Hence this strategy rules out any short-term losses and market cycle fluctuations.

In this strategy, the returns are maximised through compounding and reinvesting the earnings over longer duration. Risks are also minimised to larger extent as the investment is not pulled out on the basis of any news or global events and eventually fetch a good returns.

Trading

Trading is the strategy of generating profit in short-term. This is done by frequently buying and selling securities within a day, week or months.  It is based on the principle that stock prices move in certain directions and follow patterns. Hence buying at lower level and selling at high levels is adopted to take advantage of market fluctuations.

While investing process involves buy and hold strategy and wait to overcome the less profitable trades, trading seeks to make profits and book small losses with the use of protective stop loss. Traders use trading analysis to decide the entry and exit price of the securities.

There are different types of trading strategies adopted by the traders – Intraday, Swing, Scalping and Position Trading.

Risks Involved in Investing and Trading

As the objective of both the strategies is to generate profits, the only difference is the time. Investing is the long term strategy and trading is the short-term.

Also, in the long term, the market fluctuations, short term risks are negligible; hence the risk in investing is very minimal. While in trading, due to frequent entry and exit from the securities, the risk of loss is very high. This is because of the market volatility and the prediction of the trader may go wrong causing the trader to exit in loss.

Conclusion

When the investor is planning to invest with an objective of wealth creation with proper risk management, investing for long term is the most beneficial strategy for him. But it is important to remember that the returns are never guaranteed. Investor has to do proper fundamental analysis and valuation of every stock to make wise investment decision.

Performing analysis for each stock can be overwhelming for the investor. Here SEBI Registered Investment Advisor ” Brighter Mind ” can come to your rescue. With an expert team, we perform research and analysis on larger bucket of stocks and filter out the valuable companies. With our portfolio management service, we build the investor’s portfolio that matched their goals and risk appetite and generate maximum returns for them.