Difference Between Trading and Investing

The stock market is a place where you can invest and trade to achieve your financial goals. However, many of us tend to believe that investing in the stock market is the same as trading. Although both investing and trading involve buying and selling stocks, they are quite different in their approach.

In this blog, we will explain the difference between investing and trading in detail, along with their features and types.

What is Investing?

Investing refers to buying stocks of listed companies for a long period to create wealth through capital appreciation and dividends. Investing is basically buying shares of a company that is supposed to do well in the future; therefore, investors prefer to buy stocks at lower prices and sell them at higher prices. In order to judge the future potential of the company, it is necessary to do the necessary due diligence on the company’s financial statements and other required analysis.

Features of Investing

The key features of investing are as follows:

1. Growth Potential: Through investing, an investor can grow their capital over time.
2. Diversification: One can reduce the risk of one’s portfolio by diversifying across different sectors.
3. Tax Benefit: Long-term capital gains are subject to lower tax rate than short-term trading.
4. Compounding: Investing allows an investor to compound their returns, which can lead to a significant increase in wealth over time.

Types of Investing

Investing can be categorised into the following types:

1. Value Investing: In this type of investing, an investor selects undervalued stocks which are fundamentally strong. Value investors buy such stocks as these stocks are undervalued and significant growth can be expected in future.
2. Growth Investing: In this, the investor identifies which stocks have a good potential for long-term growth and earnings.
3. Dividend Investing: There are some companies which regularly pay dividends so investing in such companies provides a regular cash flow in the form of dividends.
4. Index Investing: This involves creating a diversified portfolio that replicates a market index or investing in index ETFs and mutual funds.

What is Trading?

Trading in the stock market involves actively buying and selling stocks within a short term to earn profits from frequent price fluctuations. Basically, the traders use market volatility to their advantage to earn profits. Short-term trading is the art of finding the trend in stock prices, and capitalize on them.

Features of Trading

The key features of trading are as follows:

1. Short Term: Trading generally involves buying and selling stocks over a short period of time typically ranging from a few minutes to a few weeks.
2. Actively Managed: A trader is required to actively track the price movement of stocks, based on various factors such as news, geopolitical events, economic conditions, etc.
3. Only High Liquid Assets: Traders generally prefer to trade in only those assets that have high liquidity.
4. Leveraged Positions: Various traders use leverage to increase their returns by borrowing funds from brokers.

Read Also: Trading For Beginners: 5 Things Every Trader Should Know

Types of Trading

Trading is highly risky as it is dependent on market volatility that can be impacted by factors such as news, economic conditions, inflation, interest rates, etc. Trading in the stock market can be majorly categorised into four types:

1. Scalping: This involves generating quick profits based on small price movements.
2. Day Trading: Day Trading In this type of trading, a trader opens a trading position and closes it within the same day. They make decisions based on technical analysis to earn profits from intraday price movements.
3. Swing Trading: The traders hold the stocks for a few days or weeks in swing trading. 
4. Momentum Trading: In momentum trading, the traders spot the significant price momentum and take a bet in accordance with that scenario to earn profits. The holding period can be up to a few months.

Read Also: Types of Traders in the Stock Market: Styles, Strategies & Pros and Cons

Difference Between Investing and Trading

There are significant differences between investing and trading, a few of which are as follows:

Particulars	Trading	Investing
Time	Trading is done on a short-timeframe, i.e. minutes, hours, or days	Investing is done for years and decades.
Objective	The primary objective is to earn profit from price fluctuations.	The objective of investing is to accumulate wealth through capital appreciation as the company’s revenues and profits grow.
Monitoring	It requires active monitoring.	It only requires periodic reviews.
Analysis	Trading is based on technical analysis.	It generally involves fundamental analysis.
Leverage	Trading is highly leveraged.	Investing is usually not leveraged.
Taxability	Short-term profits are subject to higher tax rates.	Profits earned from investing are subject to lower tax rates.
Risk	Trading generally carries high risk due to market volatility.	It generally has a lower risk level.
Investor Psychology	It requires quick decision-making and emotional control.	Investing requires patience and discipline.

Who should Invest and Who should Trade?

Trading is suitable for investors who wish to take high risks for high returns. Consistent traders have a well-defined strategy and good risk-reward ratio that helps them consistently outperform the benchmarks. However, it is hard to master trading and it is not suitable for conservative market participants who can’t monitor their portfolios regularly and can’t handle market volatility. It is true that high returns can be earned through trading but there is also a high probability of losing significant capital.

While on the other hand, if you wish to create wealth in the long run and are a risk-averse investor then investing is for you. You must be an expert in conducting fundamental analysis of companies and focus on identifying future growth drivers. Long term investing is best for those who wish to have regular income through dividends as well as capital appreciation.

Read Also: Top 10 Books for Beginners in Trading & Investing

Conclusion

On a concluding note, trading and investing are two opposite approaches to wealth creation. Trading could provide quick returns, but risk is also much higher compared to investing. On the other hand, investing follows the principle of “slow and steady wins the race”. For retail investors it is always suggested to consult your financial advisor before making any decision.

Pocketful provides you with an opportunity to earn profits from both investing and trading, through its mobile application equipped with advanced trading tools. One can open a lifetime free demat account that does not require paying any brokerage on equity delivery-based trades.

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