Whenever you start your journey in the market, you often hear a lot of terms that might confuse you. Two such terms are investing and trading. As an active participant in the market, it is essential for you to have a clear understanding of these two terms. Investing is done in products like mutual funds, ELSS, NPS, etc whereas trading is done in equities This blog tries to explain in detail the significant differences and similarities between trading and investing so that you can make some informed decisions in your market journey.
Both trading and investing are two different modes of you funding the market based on your goals. In other words, investing is a long-term approach where you invest a large sum of money at a single time or make periodical payments to meet your goals in long run. Investing is mostly about building a portfolio that can provide you returns all-time irrespective of the trends. On the other hand, trading is all about making use of periodical market dips and ups. Usually, trading is done on a short-term basis. However, you need to open a Demat account to start with investing as well as trading. When choosing the approach to your involvement in the market, you should consider the following criteria.
- Goal – Financial goals for people change for every person. You should be very clear in setting your goals. It can be buying a car, buying a house, starting a family, saving for your child’s future, or repaying your student loan. Having a clear understanding of your goals will help you choose the right approach. You can accordingly choose mutual funds or equities or any other product to meet your goal
- Time horizon – You should always have a clear time horizon you have to achieve your financial goals. Always make sure to distinguish your goals as long-term and short-term. This will help you choose the right investment product and approach to multiplying your wealth.
- Investment style – You can either invest as a lump sum amount in any investment tool or you can choose to make payments periodically based on your cash flow. Therefore, considering your cash flow and style of investment helps choose the right investments.
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The basics of investing and trading are entirely different. In trading, you mostly buy equity shares, cash derivatives, futures, and options to earn profit. This happens in a short period of time even in a day or two. Therefore, there is no need to wait for a long time to reap your returns. Trading can be done intraday also. In intraday trading, you can buy the stock and sell it on the same day. With that said, you can get your profit at times of your need with equities.
On the contrary, in investing, you buy stocks, securities, bonds, mutual funds, NPS and etc. You invest with long-term goals in your mind. Most investors mostly invest with the aim of wealth appreciation predominantly with a longer time horizon. Hence, the basics of trading and investing are different at their core.
Time-based and risk-based differences:
The time and risk factors of investing and trading are different. In investing, you invest for a long time, therefore the time horizon for investing is longer. Similarly, over the years, based on the history of the stock market, the market has always grown. Therefore, with years of investment, there is a higher chance of getting returns. The risk is also comparatively lesser in investing considering the long-term nature of the approach.
However, in trading, you buy and sell stocks for the short term. With online equity trading, the process has been made simple. You can hold the stocks for a very less time horizon. You can even exit the market even in a few minutes. Here, the primary aim of the trader is to gain profits. With short-time trading, the risk of your invested amount is also comparatively higher. This is another major difference between the two approaches.
Which one is better?
In the market, there is no universally accepted approach to suit everyone’s needs. The approach chosen by one person might not be as beneficial to another person. Hence, it is important to analyze your style before starting your investment or trading journey. In the market, comparison and generalization are always tricky considering the volatility of the market. While choosing the approach, one should always consider all the criteria such as goals, risk appetite, time horizon, etc. This helps you in making an informed decision. If you are someone who is very good at market trends and very keen on understanding graphs, you should choose to trade. But if you are aiming at building your wealth and are patient enough to wait for a few years, then, investments are for you. Choosing the correct investment approach might feel very exhausting. In that case, always contact the investment coaches to get your investments right.