What is the Difference Between Investing and Trading?

There are two ways by which you can earn money in the stock market either by Trading or Investing. People who are relatively new often tend to get confused and they mistake Trading as Investing. In reality, these are two different approaches to generate income form the stock market. Appropriate knowledge of the two helps you make a better choice, minimize risks and increase the profit earning prospects.

Let’s first look at the meaning of both the terms:

Meaning of Trading

Trading is all about buying and selling of shares in the market on daily basis. It is a way to earn quick profits by buying stocks and selling them off the same day or the day after. Traders always buy stocks at a lower price and sell them when the price shoots up. Stop-loss orders are used as safety measure by traders to protect them from incurring heavy losses.

Meaning of Investing

Investing means buying of stocks and holding on to them for a longer period of time. The investment can be for years or even decades. It is done with a purpose to earn rich dividends annually and reinvesting the earned profits into additional stocks of shares. The daily market upheaval does not make much of a difference to long term investors.

Difference between Trading and Investing

1.     Purpose – The purpose of both Trading and Investing is obviously to earn profit. But the key difference with Trading is that it is done to get an immediate return through daily buying and selling of stocks while the purpose of Investing is to build wealth through compounding interests and rich dividends in the long run.

2.     Period – More often than not, a trader sells his stocks the very same day he buys, the moment the price of the stocks increases. In some cases, he holds his buys for a day or maximum for a week.  An investor buys stocks and holds them for years or decades.

3.     Return – A trader can get a return of somewhere 10 to 15% a month while an Investor gets 10 to 15% annually.

4.     Risk – Compared to Investing, risks run high in Trading as it is aimed at earning higher profits at a short time. But setting a stop-loss order minimizes the risk of Trading to a great degree. Investing involves low risk. So the return is relatively low.

5.     Protection – A trader often protects his trading capital by setting stop-loss. When the unexpected happens and the market crashes, the stop-loss orders automatically sell the stocks at the pre-decided rates. Thus it saves traders from suffering a huge loss. Investors need to wait and watch in case of a crisis and expect the situation to improve so that the losses are recovered.

Conclusion

Having known the differences, you will want to make a choice for yourself whether you want to become a trader or an investor. At Indira Securities, we conduct short and intensive training programs for beginners on how to trade and invest. Our hands-on training and expert advice help you make wise trading and investing decisions. Open a Demat account with us to enjoy all-time quality services.