What is the difference between investing and trading?
Players in the equity market are called investors and traders. The names are often considered interchangeable. This assumes that investors and traders are the same.
That is not so. There are key differences between the two.
Investing and trading are two different mechanisms employed to make a profit in the financial markets. Though both investing and trading may appear as parts of the same process for someone who is relatively inexperienced in the financial market, in reality the two are far from being similar.
Lets us look at the two separately to understand the difference between them.
- Investing is traditionally related to buying stocks or other financial instruments that are expected to fetch returns over a long period of time. They are often held onto like family silver for several years.
- For this reason, it is important that investors select stocks or bonds of companies which are expected to grow in the long term. Thus, investing involves intense fundamental research about the potential investment target, be it a stock or a long-term bond.
- The aim of an investor is to create a balanced portfolio of different stocks and bonds that give returns through increase in value as well as dividends or interest income. This enables him or her to attain financial security.
- As a result, investors do not sell their holdings regularly. It is only in case of an emergency or when the stock has met its long-term targets.
- Trading is characteristically associated with buying and selling stocks, commodities, currencies, bonds or other financial instruments over shorter periods. This is primarily to make profits from the short-term movements in prices of these securities. So, traders essentially take advantage of volatility.
- Assessing good trading opportunities typically makes use of trading systems or chart-based techniques to detect short-term patterns in prices. This is called technical analysis. It involves more frequent buying and selling of stocks or other financial instruments.
- The main difference between trading and investing is the former provides opportunity to realize profits from volatile trends in the market. In investing, short-term gains and losses are ignored for long-term gains, which are achieved as the company grows.
- A trader will concentrate of the perceived market value of the stock. He or she would not be interested in the financial health of the underlying company. An investor though would be thoroughly interested in the company’s financial performance more than the share’s trends.
- Trading requires holding on to a stock or financial instrument for a day or maybe until it hits a short-term target. Investing involves holding onto a stock for longer durations.
- Trading involves selling off the stock/financial instrument as soon as it hits the target price or crosses the loss threshold (also called the stop loss price). Investing involves ridding out the downtrends of the market and not to sell unless required.
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