What is the Difference Between Investing and Trading?
Reading time: 6 minutes
When investors first enter the stock market, they think of rapid buying and selling of stocks for quick profits. Trading by transferring assets – like stocks – on shorter time frames to make profit is one way of investing, but it is not the only way. Traders are trying to profit from short-term changes in the market through frequent position changes by buying and selling shares based on a specific strategy and trend.
Trading is at the opposite end of the gamut in comparison to long-term investing. Investors' goals are usually more conservative (and less active), and possibly associated with goals like dividend yields or capital growth. According to CNBC's Jim Cramer, if an individual invests in a stock that goes down and their long-term confidence in the stock remains unchanged, an argument can be made to add to the position.
When it comes to investing in commodity stocks, in some cases it doesn't matter which ones they pick – going for a better balance sheet or higher growth – if the underlying commodity price drops, then they all go lower. However, there might be an exception to this case, and that's when the listed company has long-term hedge contracts on its commodity output – these are less affected. In that scenario, the commodity price is locked in for a future period, allowing the company to maintain its profitability at a prior price before the drop.
Cramer usually prefers to buy a smaller position in a stock, like sending a scout entry into the battle, with the hopes of adding more at a lower price. "I buy down when I'm investing," Cramer concluded. "I cut my losses immediately when I'm trading if the reason I am trading the stock doesn't pan out."
In regard to wealth creation in the equities markets, investing and trading are two separate concepts. For example, let's say you and your friend bought an equal amount of seeds to sow in your fields. You decided to sell them to someone after the first day because you could earn profits and thus, release your capital for your next investment or trade. Your friend, on the other hand, sowed the seeds and let them grow in the fields, making a harvest for profit, while also generating new seeds for future harvests or sale. He sowed seeds again and continued doing so for years, and also sold a lot more seeds than he eventually bought. By investing his seeds, he might have made quite a profit difference than what you made by trading your seeds after day one.
Let's learn about five critical differences between investing and trading!
Return on Investment (ROI): Growth of Capital
Traders look at price action associated with stocks on the market. If the selling price goes higher, traders might want to sell the actual stocks. Trading is actually the skill of proper timing whereas investing is the skill of creating prosperity and wealth by increasing interest, as well as dividends throughout the years, by keeping quality stocks and shares in the market. However, with trading you might be able to capitalise on short-term market movements, thus making quicker profits. Investments are often held for a period of years, or even decades, taking advantage of perks like interest, dividends, and stock splits along the way.
The Actual Time Frame
When we talk about trading, we need to mention the difference in the actual time frame compared to investing. Trading is a method of holding trades for a shorter period of time. It could be days or weeks! Traders usually hold stocks until the short term high performance. On the other hand, investing is usually "set and forget" – also known as the buy-and-hold principle. Short-term market price fluctuations are generally insignificant for the long-term investment portfolio. Trading profits are generated through buying at a lower price and selling at a higher price (also known as buying the dip and selling the rally).
Both investing and trading imply risks associated with your funds. However, both buying and selling require higher risk as well as higher possible returns since the price may go higher or lower in a short while. Because investing is the art of holding the stocks for many years, it requires a while to build up. It involves relatively low risk and also lower earnings in the short run; however, it might provide higher profits by increasing interests along with dividends in the case when stocks are held for a longer time period. Intra-day market cycles usually have a significant effect on high-quality stock assets for a longer time. We might say that risks associated with trading are higher. But there is an actual saying that traders like to repeat: "Who dares wins".
Technicals vs Fundamentals
Traders are skilled persons who rely on technical analysis and time the market. They also need to know about momentum, time frame, and trend to hit higher profits in the stipulated time; it is related to the psychology of the market. Investors, on the other hand, deeply analyse the stocks they want to invest in. They heavily rely on learning business fundamentals and commit to stay in the investing business for a longer period of time. Simply put, the fundamental analysis of the stock market is related to the philosophy that runs the business.
In the long run, investing is generally for those people (investors) who want to make money, but at the same time, steer clear of huge failures. They hope to gain a decent ROI by re-investing their dividends and making money in the long-term. Traders are action-minded people who love the thrill of the market. Intra-day short-term trading and intra-week swing trading are generally for action and sometimes for the "adrenaline" type of individuals who don't necessarily mind losing in order to make profits. Whatever the case might be, investing or trading, there is potential for everyone. Take your chances and start trading or investing. Or do both!risks.