Do you want to earn some money every day or earn a lot of money that you can get after a long time?
That’s essentially the question at hand when you are comparing trading vs investing. Even before we delve deeper into the difference between trading and investing, please note earning some money or a lot of money is dependent on a lot of factors, and no returns are guaranteed when it comes to any investments.
With that statutory warning out of the way, let’s look closely at trading and stock market differences. What is the difference between traders and investors? How do traders and investors make money? And most importantly, which investment style is more profitable?
Difference Between Trading and Investing
There are certain fundamental differences between these two concepts, but at heart, they both involve investing money into the secondary stock market.
The primary difference between traders and investors is, traders keep their funds invested for a short timeframe and investors invest for a longer period. Let’s compare the essential differences between these two investment concepts below.
| Parameters | Trading | Investing |
| Definition | Trading is by definition the act of buying shares and selling them within a short span. This span can be a few minutes to a few weeks. Trading involves buying and selling stocks based on market movements to gain maximum returns in the short term. Traders buy shares with the intent of selling them rather than holding them. | Investing refers to buying shares of a company and holding on to your investments to get long-term returns. The span can be anything from a year to 30 years. Investors purchase shares and get the benefits of dividends by holding their shares and sell it later on when the price has significantly increased. |
| How It Works | Due to market volatility the prices of shares rise and fall at all times. The price of a share can even change during a single trading day. Traders target specific shares, purchase them when their prices are increasing and sell their holdings when the share prices start going down again. This is the basic principle of trading. The holding period can be a few hours of a trading day to a month based on the trading strategy employed by the investor. | There are different ways and strategies when it comes to investing. Investors invest their money in companies that they like and support. The goal of buying the shares is to be a part of the company’s future. Investors can hold their shares and as the company grows, their investments grow too over time thanks to the power of compounding. A simple investment of ₹50,000 can be worth over ₹14 lakhs if the investment compounds at 12% per annum on average over 30 years. |
| Involvement | Trading is very hands-on and requires investors to be thoroughly knowledgeable about market dynamics and economical conditions of the country. To be successful, traders need to be well educated in this field so as to not lose their money during trading. It also requires active participation on a daily basis to ensure their holdings are being bought and sold as per the market changes to ensure maximum profitability. | Investments are less hands on compared to trading. Investors too need to rebalance their portfolio and be aware of market dynamics and the economy, but they don’t need to rebalance their portfolios every day. This can be done once a year and it’ll still help investors get their desired returns. The goal of investing is holding and waiting for the value to gradually rise over time. Short term changes are not the primary concern of investors. |
| Sum Required | The price of a share generally doesn’t change from ₹1 to ₹100 in one day. So, to get meaningful returns, investors need to invest a large sum of money whenever they are making trades. Even if they lose their money, they still have to go for lump sum investments to get back into trading and earning good returns. | Investors have the opportunity to buy just one share a month of a company, which does not require them to invest a huge sum. Since the goal of investors is to hold their shares, they do not have a need to invest in a lump sum at all times. An investor can invest their surplus monthly budget into any stock they choose at the end of a month and still be able to get great results as those companies grow over time. |
| Advantages | Trading allows investors to make money and withdraw it quickly. An experienced trader can plan strategies that allow them to earn significantly higher returns compared to investors. Being able to withdraw the funds from the market allows traders to have real income from their trading activities. | Investing can help people build wealth over time. Long-term investment strategies can help investors create a retirement fund or a goal-oriented fund and achieve it over time. Investors also get benefits from the companies that they are invested in, from dividends to other shareholder benefits. |
| Disadvantages | Trading can be a full-time job and require incredible efforts from a person to get good returns from trades. Trading also has a significantly high barrier for entry due to the fact that traders need to be well educated about the stock market. They also need to have access to lump sums for investments. | The returns earned from investments can vary year-on-year. They may also not offer positive returns as holding shares do not guarantee good returns in any way. Compared to trading, investing can sometimes offer lower returns. |
What’s More Profitable? Trading or Investing
Now that you know the details of trading vs investing, which one is more profitable? The key to this answer is to practice both. If you are interested in the stock market, you have time, and you are passionate about finance, you can opt for trading, but not as an alternative to investing.
Similarly, if you don’t have time, or if you are not very confident about what you’re doing, you can start with investing. However, over time, it is required that you also practice trading as you grow your knowledge. Trading can help you make good returns and make sure your long-term investment plans can be reached quicker.
Investing can help you bring security and some balance to your trading activities and ensure you do not incur heavy losses even if the trades do not work out as planned.
Also Read: Real Estate vs. Stocks- Where to Build Wealth Faster?
Conclusion
Lastly, to make trading more stable, choose investing in ETFs (Exchange Traded Funds) and to get higher returns from share investments, choose mutual funds. Now, what are ETFs and mutual funds?
They’re an alternative to investing directly in the stock market and trading or investing in individual shares. Mutual funds and ETFs have better liquidity, lower risks, and can offer better returns for both investors and traders. So, make sure you keep an eye on this space to learn more about mutual funds and ETFs.
Add Comment