Difference Between Stock Market Investing & Trading? – It’s Advantages & Disadvantages

Trading and investing can be compared to sprints and marathons of the Olympics, though both of them require intense training, sprint focuses on the short term, whereas marathons focuses on the long run.

Similarly trading is focused on short term gains, on the other hand investing is focused on the long term capital appreciation.

What is Trading?

Holding stocks for a short term like days or hours or even minutes and then closing our position with a profit or loss is known as trading. Trading is one of the most famous approaches among new investors, as the time period between buying and selling of stocks is very less.

Trading is primarily done for a short term gain, in trading we have to look upon the short term price fluctuations and use the market inconsistency for our own benefit. Technical analysis is usually used for trading and a trader is less concerned about the performance of the company rather he is concerned about its price movements.

What is Investing?

Investing is a time taking process but it is the one which rewards the most in terms of capital appreciation, the greatest weapon that investors have is compounding.

Investors tend to look upon the performance of the company, its future, financials, management and much more. They are concerned about the company and are not affected by short term fluctuations in the market.

What Is The Difference Between Trading And Investing?

The main difference between the two is the time period we hold the securities. The main goal of investing is to build and accumulate wealth over a long term by carefully selecting the stocks and assets.

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Whereas the main goal of trading is to earn higher profits from the price fluctuations within a small time by observing the price movement of a stock and entering in them at the right time.

Based on the needs and goals along with investing ideology people decide to invest or to trade.

Risk and ReturnsRisk is greater in trading as you could lose all your money but the returns could be even greater if done correctly.Trading needs a higher investment of money to earn a substantial amount of earningsRisk is minimized by investing for a longer time period.Investing can be started from a small amount of money
Analysis Investors use fundamental analysis to find out a stock’s real valueTraders use technical analysis and charts to evaluate and predict stock’s movement
Brokerages commission A trader conducts a number of transactions in a short time, which can result in a higher brokerage and commissions for traderBrokerages and commissions can be insignificant in investing as they hold an asset for a very long time.
Difference Between Stock Trading & Investing.

What Are The Advantages Of Investing ?

  • Compounding

This is the most significant advantage of investing, many investors have admitted the role of compounding in wealth accumulation as a multiplier.

Compounding helps generate interest on the interest earned, in turn building a massive corpus.

  • Beats inflation

If you don’t invest in any assets then you will end up losing money in the long run due to inflation. Inflation causes the decline in the purchasing power of your money, through investing you can easily beat inflation and grow your money.

  • Provide You a Regular Income

Investing in some assets, which include dividend paying equities, bonds, real estate and REITs among many others which can provide you a regular stream of income which could cover your day to day expenses.

  • Risk reduction

There is risk associated with any type of investment. In investing that risk factor gets mitigated as the time period of the holding is of years and it gives market enough time to grow your capital after the short time fluctuations

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What Are The Disadvantages Of Investing?

  • Time period

The time taken to grow your money is in years so people looking for making a quick profit should avoid investing

  • Company’s performance

Although we research a lot about the company we want to invest in and are dependent on its performance to make your investment a profitable one. If the company doesn’t perform as per our expectation, then there is a chance to lose your principal amount.

What Are The Advantages Of Trading

  • Quick gains 

If you have experienced stock market then with right strategy you can make meaningful gains

  • Liquidity 

If you need money to expend then it is a convenient way to meet your goal by selling securities instantly.

What Are The Disadvantages Of Trading

  • High risk

Trading is a highly risky process and without proper knowledge you can end up wiping your entire capital. There is a saying “90% traders lose 90% capital in 90 days”.

  • Timing The Market

Trading leads traders timing the market which proves to be a very poor strategy as no one can predict when the market will go up or down. It is a difficult task even for the most seasoned trader to predict the market movement with accuracy.

End Note

Trading and investing are two vast approaches to create wealth and capital gains in the stock market. Obviously you would need a different set of skills to excel in both of these investment approaches. Although if you are a beginner, it is advisable to avoid trading, especially day trading if you are an absolute beginner, until you gain some experience of the ups and downs of the stock market.

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Frequently Asked Questions (FAQ)

  1. Which is better investing or trading?

    Investing is long-term and involves lesser risk, while trading is short-term and involves high risk. Both earn profits, but traders frequently earn more profit compared to investors when they make the right decisions, and the market is performing accordingly.

  2. Who earns more traders or investors?

    An investor may be happy to earn 15-20% return per year, while a trader, with some experience and analytical skill can earn 5-10% per month. If you have a knack of finding the right stocks that will go up in the short term, you may be wasting your time investing instead of trading.

Roonak Khandelwal
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