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Difference between Trading and Investing

7 September 2020 No Comment

Even though investing and trading seem similar there are significant differences between them. Both of them are used for the same purpose, i.e. attempting to gain profit in the financial market. For gaining deeper insights, let’s go over the specifics of making more money by differentiating on the basis of 5 aspects.

Duration

In investing, money is spent on stocks and shares in the hope of generating large returns in the future. An investor articulates accordingly and places money to benefit over time, so investing is a long-term game. On the other hand, stock trading or share trading is buying and selling investments. Trading is a relatively short-term game that lasts from a couple of seconds to months and aims at gaining profits through market volatility. Take day trading for example: in this approach, a trader buys and sells a stock within the same day.

Do you know how the traders and investors analyze them? 

The method in which the traders and investors analyze data is also on two very different paths. Trading is all about keeping an eye on the stock prices, which is the number of people selling and buying a stock at the given point in time. So, a trader might buy a stock but sell it based on the rise in the stock price at the given time.  Whereas, investing is focussed on the intrinsic value or the true value of the stock. This means that the investors are not worried about the rise and fall of the stock price, but the value of that stock over long periods of time.

So, how would you analyze investment and trading opportunities?

Traders measure the stock’s price on the basis of technical aspects like a trend or a pattern that has led to the surge in the prices of a stock and inevitably the share. So, many traders care about the short-term swings and do not need an in-depth knowledge of the company. Traders use technical analysis, in which the price and volume of the stocks are analyzed. Whereas, investors use fundamental analysis for predicting the growth of a particular firm. This involves making oneself familiar with the profit and loss accounts, balance sheets, annual reports of the firm, etc.

Let’s have a look at the risks involved in both.

Even though both the approaches are risky. Trading involves a higher risk and a higher potential return, thanks to the volatility of the market. Whereas, investing involves lower risks, but involves returns based on compounded interests and dividends if kept for a possibly long time as the surge and dips in the everyday market do not affect the stock in the long term.

What do you need for stock trading?

You need to have a DEMAT account if you are aiming to be a trader since trading is done electronically and carrying out a transaction with the account will not be possible, which is applicable for buying and selling stocks. Whereas, investing in stocks or shares, such as mutual funds is possible even if you do not create a DEMAT account.

When both are kept in comparison, investing is the better way to go for the average person, by carrying out comprehensive research. Over the long term, you are more likely to benefit from the broad growth of the economy and the stock market as a whole.

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