What Is The Difference Between Trading And Investing?
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Investing is a long-term approach where the goal is to build wealth gradually over the long term using investing schemes such as mutual funds, buying and selling a portfolio of stocks, bonds, a basket of stocks, and much more. Unlike trading, investing is held for years and decades with several perks such as interest, dividends, stock splits, and many more. Besides, in investing, the risk of downtrends and market fluctuation is ruled out because there is always an expectancy the prices will soar, and since it is a long-term investment, the investor need not worry about the particular downtrend as it will last for a shorter period.
Investors are more concerned about the market fundamentals and not the upward or downward trends that change every day. The market fundamentals such as Price to Earnings ratio (P/E Ratio) is the major interest for the investors in the long-term.
Trading is a short-term and volatile process that involves frequent transactions based on the trends in the market. It is relatively short compared to long-term transactions such as mutual funds or bonds. Common examples of trading are stocks, commodities, currencies [Forex], or other financial instruments. The advantage of trading over investing is more profit. Suppose long-term investors earn 10-15% of the profit annually; a trader can earn the same 10-15% monthly depending upon the choices and decisions of the trader. But that is not all; trading is dynamic and volatile; it is a high-risk money-making process where the market trends directly affect the trading and can incur both heavy profits and losses.
The basic fundamental of trading is to buy when the price is low and sell when the price is high, but there are several other strategies such as reverse trading and short-selling, which only seasoned traders use to make high profits in the short term. Such strategies are risky and not recommended for beginners.
Investing vs. Trading - The Major Differences
There are several differences between trading and investing, but the most popular differences are the investment approach and the time involved.
1. Investment Approach between Investing and Trading
The critical difference between investing and trading is the type of approach involved in both methods. In investing, the investor uses the fundamental analysis of the company, and in trading, it involves technical analysis.
Fundamental analysis involves the company's financial analysis, previous financial records of the company, analysis of the industry on which the company is based, and the overall performance of the industry based on the macroeconomic situations in the country and the results.
Technical analysis is everyday financial trends such as the company's performance in numbers based on the uptrends and downtrends in the market every day. It requires the traders to study the company closely and every day as it makes financial decisions and reflects in the charts and numbers in the stock market. This data helps the traders to make significant predictions of the changes and involves studying trends in volume, price, and moving averages.
Traders need to act dynamically and buy or sell based on the current trends while investors study the company closely, invest in it and hold it for a longer period to earn profit with lesser risk.
2. Time-Based and Risk-Based differences between Investing and Trading
There is a difference in time involved in both the market-based money investments. Investing involves studying the company closely and holding it for a longer period with the expectation that it will return profits in the long haul; this type of investment involves lesser risk and may incur not huge profits but are relatively safe to the market trends. A classic example of "investing" is mutual funds and involves lesser risk and lesser profit. Other examples are bonds or baskets of stocks for long holding positions. The time frame can range years together and is less dynamic. The trend in the market that lasts for a shorter period does not make any difference to the investors.
Trading studies the companies closely with everyday trends to predict the future change on which they could earn better profits. This is a short-term investment and can involve buying and selling within a single day, weeks, or months based on the market situations. It is a high risk-reward ratio as the market is volatile, and one wrong decision can incur huge losses. A classic example of trading is the basis of the stock market, where the trader buys a certain number of stocks when the prices are low and sells them when the prices are high to generate huge profits. This time approach not only allows the traders to make quick transactions but also earn more compared to the long-term investors.
Conclusion
The major differences between investing and trading are approaches, risk, and time involved. It is okay to do both, and it depends on the risk-taking ability and patience of the person to choose between either of these or both of these. Investing is long-term and involves lesser risk, while trading is short-term and involves high risk. Both earn profits, but traders frequently earn more profit compared to investors when they make the right decisions, and the market is performing accordingly.
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