Investing and trading are two very different animals and approaches to wealth creation or attempting to make a profit in the market. When it comes to wealth creation in the equity market, investing and trading are the two genres of the field. The goal of investing is to gradually build wealth over an extended period of time; whereas trading involves more frequent buying and selling of stock, commodities, currency pairs or other instruments, with the goal of generating returns that outperform buy-and-hold investing.
Imagine, today, you and your friend bought an equal amount of seeds to sow in your fields but you sold your seeds to someone in a day because you could earn a profit. However, your friend sowed the seeds and let them grow for a few years till they gave new seeds. He sowed the new seeds and continued this for years and sold a lot more seeds eventually than were bought. By investing his seeds he would have made profit quite different than what you made by trading your seeds. This is simply the difference in investing and trading. To learn the same in financial markets, let’s learn 4 key differences between investing and trading.
1) The Bottom Line
Trading is a method of holding stocks for a short period of time. It could be for a week or more often a day! A trader holds stocks till the short term high performance, whereas, investing is an approach that works on buy and hold principle. Investors invest their money for some years, decades or for an even longer period. Short-term market fluctuations are insignificant in the long-running investing approach.
2) Capital Growth
Traders look at the price movement of stocks in the market. If the price goes higher, traders may sell the stocks. Simply, trading is the skill of timing the market whereas investing is an art of creating wealth by compounding interest and dividend over the years by holding quality stocks in the market.
Undoubtedly, both trading and investing imply risk on your capital. However, trading comparatively involves higher risk and higher potential returns as the price might go high or low in a short while. Since investing is an art, it takes a while to develop. It involves comparatively lower risk and lower returns in a short run but might deliver higher returns by compounding interests and dividends if held for a longer period of time. Daily market cycles do not affect much on quality stock investments for a longer time.
4) Art vs. Skill
Let’s learn it this way, trading is a one-day cricket match while investing is a test cricket. You would watch skillful players in the team who are expected to strike fours and sixes to score higher in a one day match. Whereas, the art of the game is seen in the test match! Similarly, traders are skilled, technical individuals who time the market and learn market trends to hit higher profits in the stipulated time. It is related to the psychology of the market. Investors, on the other hand, analyze the stocks they want to invest in. Investing also includes learning business fundamentals and commitment to stay invested for a longer term. It is related to the philosophy that runs the business.
Traders put money in a stock for a short term. They buy and sell fast to hit the higher profits in the market. Missing the right time may lead to a loss. They look at the present performance of the companies to hit the higher price and book profits in short term. Investors keep themselves away from the trends and invest in value. They invest for a longer period of time keeping an eye on the stocks they hold. They patiently wait till the stock reaches its potential. Ultimately, the ones who achieve their financial goals are successful!
Going back to our story, you are the one to decide if trading the seeds at a higher price making a smaller profit in a short time is your goal or holding on and growing more seeds to sell at a much higher price, in the long run, is what you aim for.