Trading or Investing? Which one would yield person high gains from United States of America Stock Market. We have covered all the points which will lead you to the conclusion of these paradigm.
Most of the people have heard term trade and invest before jumping into stock market. They are only familiar with these words. To elaborate, they only know that these words exist and both of them are same. They are like it is a just a different style of talking. Some say I trade and some say I invest. They think like as far as stock market is considered, both words indicate to same concept. But, in reality it’s not true at all. And this is for beginners. When I say beginners means they are have not heard about stock market but just started researching on this topic and now confused between these two terms. So, anyways make sure you watch this video till the end to understand the actual meaning and main difference between trading and investing.
Starting with a small story. Years before, I met with my old contact while on the way to home and as always, we started talking about what is going on in each other’s life and that introductory or I can say formal talk eventually landed up on stock market. The gentleman couldn’t stop boasting about the insane amount of money he was making and how his returns tripled in a small span. At that time, I wasn’t that much interested in stock market but listening to the money he is making I was like Yeah; I should try the stock market once.
As who knows I might just be able to rake in profits too; in fact, I even started dreaming about the various comforts I would be able to afford once I become the next stock market star.
Knowing nothing about the stock market I googled “top stocks to invest in”, and jumped headlong with 1000 dollars. I was in for a rude awakening when my trade halved within a week. Disappointed you ask? NO. I was devastated! My mind completely shattered that I spent 500 dollars on nothing.
And then it Turns out to be, there are many in the same boat as me. Millions of retail investors have tried “trading” in the stock market and lost their money. So, what is it that I and many others should’ve done differently?
It all boils down to the inherent difference between trading and investment and the various aspects of these approaches. I will cover in detail four differences between investing and stock trading and using that you can see which approach is better suited to retail investors.
1) Technical v/s Fundamental Analysis:
The first difference between trading and investing is in the approach both these methods employ to make money from the stock market. Traders use technical analysis to base their buy and sell decisions where as investors use fundamental analysis.
Fundamental analysis focuses on the company’s finance, analysis of the industry in which the company fits in and the general macroeconomic situation in the country.
The analysis consists of studying the financial health of the industry and the company and the future growth prospects whereas technical analysis uses charts instead of annual reports and charts and patterns.
Technical analysis does use the market price of the stock to predict future patterns and analyse historical ones but does not concern itself with analysing factors affecting market price. Its studies trends in price, volumes and moving averages over a period of time.
A trader doesn’t concern himself with what the company does, or what the company’s future growth prospects are.
This is a key difference between trading and investing. Trading involves more technical analysis whereas fundamental analysis is more essential in investing.
Trading involves identifying market trends and then quickly buying or selling stocks to book profits. Investing, on the other hand, is based on buying stocks of a company after carefully analysing the business of a company.
Stock investors select fundamentally strong companies and invest in them for the long haul; as the business grows so does the value of their stock. For a stock market investor, short term market volatility is of no significance.
2) Time Horizon:
Let’s understand this with an example. Suppose you have money and you buy a house in a good locality. Within two weeks the price of your property increases and you sell it for a profit. This is called trading.
However, if you purchase a property because you know that it has immense long-term appreciation potential since a national highway will be built near it a few years down the line, and hence hold on to it then you are basically investing.
Trading basically means holding stocks for a short period and making a profit by selling stocks as soon as the price touches a high. The period of consideration for traders can range anywhere from a day to weeks to months. Many traders may buy stocks in the morning and sell by the end of the day.
Market fluctuation has very high importance and influence on the decisions a trader takes. Investing, on the other hand, is done with a long term perspective. A stock investor selects stocks based on strong fundamentals and once convinced holds on to them for a longer period of time, ranging from a few years to decades, to even more.
3) Risk Appetite:
Which is third main difference between trading and investing.
Whether you trade or invest, your capital is at the mercy of markets and hence there is a risk-return trade-off you should be aware of.
However, when it comes to investing vs trading on the basis of risk, trading ranks higher. The simple reason why trading is riskier is that trading involves taking super quick short-sighted decisions, which may go well and go horribly wrong as well.
A trader does not base his decisions on how promising the growth prospects of a business are. He may buy a scrip based on external influence and lose money when the prices hit a low which can also make it riskier.
Needless to say, trading can oscillate between highs and lows quite rapidly. On the other hand, investing as a habit takes time to develop and reaps results in long term.
The risks are lower and comparatively the returns are lower when the period of holding is less, however, if stocks are held for a long time, your investment can fetch higher returns due to compounding effect of interest and dividends. If the stock you have invested in is fundamentally strong, the daily market fluctuations will have negligible to no impact on your investment.
4) And generally, most of the time which thing to do in your life if you have got many choices totally depends on your personality or attitude. So, when you get question whether to do trading or investing you should self-analyse your attitude and way you think.
Trader (Buy and Sell) Investor (Buy and Hold)
A trader is of an impatient personality. An investor is slow and steady in approach
Trader takes decisions within minutes, days, weeks, months Decisions are based on long term consequences hence range from years to decades.
Times the market; missing the right time to enter or exit may lead to loss Do not time the market or get bothered by short term market volatility.
Requires real-time data and information to take buy and sell calls hence is on his toes all the time Is of a more relaxed disposition, information only regarding fundamentals needed.
Is more likely to buy stocks based on recommendations by friends , other stock market traders, media and other external resources
Invests only when his investment objective aligns with a business. Does his own research, and invests only after he completely convinces himself of the potential of a business.
So wrapping up Which is more suitable and profitable?
Of course answer depends on individual. Everyone has different approaches.
If you look at the difference between trading and investment you will be able to see that investing approach is more suited to retail investors who want extra exposure to equities.
The advantages that accompany a stock investing mindset are numerous. All you have to do is base your bets on a business that is strong in its core offerings, is constantly innovating and adapting to customer requirements and has a solid management team backing it.
Once you are sure of this, you just need to “ buy right and sit tight”. When it comes to investing vs trading none of them have a guaranteed formula for making money in the stock market.
An investment approach will ensure success in a longer period of time. It will also allow you the much-needed peace of mind that traders never get in there attempts to time the market.
So analyze a company fundamentally, invest in the business, remain unperturbed by the market noise and stay invested to reap long term benefits and profits.