Every individual’s financial journey has the same overall goal — to generate profits and obtain the funds needed to meet various short-term, medium-term and long-term financial objectives. Two methods can help achieve this goal. They are investing and trading.
Not many people understand the differences between trading and investing. Over time, this can prove to be a costly mistake. Fortunately, in this article, we’ve examined the trading vs investing phenomenon comprehensively. Check out the meaning of these two practices, how they are different and which one may be suitable for you.
Investing and Trading: What Do They Mean?
Investing is a long-term strategy that involves purchasing assets whose price may appreciate over time. You identify different assets like stocks, securities, real estate and even gold, assess if their prices may follow an upward trend over the next 5, 10, 15 years or longer, and then buy the assets that show promise. Over the long term, if the price of the asset appreciates as expected, your capital grows exponentially. Thus, investing could help you create wealth over the years.
Trading, on the other hand, involves leveraging short-term price fluctuations in assets like equity stocks, currencies, gold and other assets. You study the market to determine how the price of an asset may move over the short term. Then, you take a long or short position accordingly. A long position involves buying an asset whose prices are expected to increase in the coming hours, days or weeks. A short position involves selling an asset whose prices are likely to decrease over the short term. You then close the position at a profit.
Common Trading Strategies
Trading strategies vary widely, each with its own risk profile and time horizon. Here are some common strategies used by traders.
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Day Trading
It involves buying and selling securities within the same trading day. Here, you aim to capitalise on small price movements and avoid overnight market risk.
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Swing Trading
This strategy targets gains from short to medium-term trends in stock prices. Swing traders hold positions for several days to weeks, and use technical analysis to identify market momentum.
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Scalping
Scalping is a strategy that aims to make profits from very small price changes. Scalpers make a high volume of trades and hold positions for very short durations, often just minutes.
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Position Trading
This type of trading involves holding a position for the long term, spanning from weeks to months or even years. It’s based more on fundamental analysis and focuses on long-term market trends.
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Momentum Trading
Momentum traders look for stocks moving significantly in one direction — with high volumes — and try to ride the momentum to obtain the desired profits.
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Algorithmic Trading
This trading strategy relies on computer programs to execute trade at high speeds and volumes based on predefined criteria.
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Options Trading
Options trading involves buying and selling options contracts on securities. It allows for leveraging and hedging investment strategies.
Common Investing Styles
Depending on the goal of investing and the criteria used to select and purchase assets, investing styles vary greatly. Some common types of investing include the following.
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Value Investing
This type of investing focuses on undervalued companies with strong fundamentals. Investors buy these stocks and hold them until their prices reflect their intrinsic value.
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Growth Investing
Growth investing targets companies that exhibit signs of above-average growth, even if the stock price currently appears expensive in terms of metrics like the price-to-earnings ratio.
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Dividend Investing
This strategy involves investing in companies that pay high dividends. It’s preferred by investors seeking regular income along with long-term capital growth.
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Buy and Hold
This is a passive investment strategy where you can buy stocks and hold them for a long time, regardless of short-term fluctuations in the market.
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Socially Responsible Investing (SRI)
This is an emerging investing style that focuses on investing in companies that meet certain ethical, social, governance and environmental criteria.
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Contrarian Investing
This strategy goes against prevailing market trends. Contrarian investors buy stocks when others are selling and sell when others are buying.
Trading vs Investing: How Do They Compare?
Now that you’ve seen the meaning of investing and trading and the common strategies used in each technique let’s look at the key differences between trading and investing.
| Aspect | Trading | Investing |
| Goal | To profit from short-term market fluctuations | To build wealth over time through capital appreciation |
| Time Frame | Short-term, ranging from minutes to weeks | Long-term, typically years to decades |
| Risk Level | Generally higher due to short-term market volatility | Comparatively lower as there’s more time to recover from market dips |
| Approach | Active, involving frequent transactions | Passive, involving fewer transactions |
| Nature of Analysis | Primarily, technical analysis focused on market trends and patterns | Primarily fundamental analysis of company performance and market conditions |
| Decision-Making | Quick decision-making based on market movements | Long-term decision-making based on thorough research |
| Profit Potential | Generated by buying low and selling high over a short period | Generated through long-term capital gains and dividends or interest |
| Market Knowledge | Requires in-depth knowledge of market timing and trends | Focuses on broader economic factors and company fundamentals |
| Emotional Discipline | Requires significant emotional discipline to make quick and objective decisions | Requires patience and a long-term perspective |
| Skills Required | Quick analytical skills and ability to react to market changes | Patience, research skills and an understanding of the market fundamentals |
| Diversification | Often less diversified due to short-term focus | Generally more diversified to mitigate long-term risk |
| Capital Requirement | Can be high due to the need for frequent transactions | Can be more flexible; even allows for gradual investment via SIPs |
| Suitability | Suitable for those who can dedicate time and manage high risk | Suitable for those looking for gradual growth with lower risk |
Investing or Trading: Which is Right for You?
In all likelihood, you will need to include both investing and trading in your overall financial strategy over the years. Nevertheless, it helps to understand the specifics, as outlined below.
Trading may be suitable for you if and when:
- Your financial goals are oriented towards achieving profits over a shorter time frame
- You have the time to actively monitor the markets and manage your trades
- You are comfortable making quick decisions based on market movements
- You understand and accept the higher risks associated with short-term market volatility
- You’re skilled at technical analysis of market trends and charts
- You can maintain discipline and control in stressful situations
- You have enough capital to engage in frequent trades while managing the risk of loss
On the other hand, investing may be suitable for you if and when:
- You’re focused on building wealth over an extended period
- You want to save up for future goals like retirement
- You prefer setting up a portfolio and making occasional adjustments rather than daily management
- You prefer a lower risk profile and slower, more steady growth over time
- You have the patience to wait out market fluctuations
- You’re looking to earn through dividends or interest in addition to appreciation in value
- You’re investing with future financial stability in mind
Conclusion
This sums up the trading vs investing comparison. Knowing the differences between trading and investing can help you make informed decisions about which strategies to use to further your financial goals. You can, of course, include both investing and trading in your financial plan. However, it’s important to use trading for short-term goals, while investing may be better suited for medium-term or long-term milestones.
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FAQs
What is the main difference between investing and trading?
Trading involves buying and selling financial instruments within a short time frame. So, you aim for quick profits. Investing is about buying and holding assets for a longer period. Here, you may seek gradual capital appreciation and income through dividends or interest.
Which is riskier, investing or trading?
Generally, trading is riskier due to its short-term outlook and reliance on market volatility. Investing is considered less risky because it focuses on long-term growth and gives your capital more scope to ride out short-term market fluctuations.
Can I include both trading and investing in my financial strategy?
Yes, many people engage in both investing and trading. You can use trading strategies for short-term gains while maintaining a separate portfolio for long-term investments.
Do investing and trading require different mindsets?
Yes, trading often requires quick decision-making and a tolerance for higher risk, whereas investing demands patience, long-term planning and a focus on the fundamentals.
How do profits differ between trading and investing?
In trading, profits are realised in the short term and can be frequent but variable. In investing, however, profits tend to accumulate over the long term through capital gains or dividends.
