People put their money into the share market to generate wealth. Many think to earn big from a long- term investment. However, others might prefer short-term investments and sell their shares to grab decent profits from price fluctuations. The first case scenario is called an investment, and the second one is called trading. Investing and Stock Trading often considered similar, and most of us assume that they are the same. But there are many differences between Investing and Stock Trading. Both of them use different mechanisms to generate profits in the stock market. We need to dig into various parameters like company background, share price, profits, price-to-earnings ratio, etc. before deciding our way. Thinking again, Stock Trading vs Investing – Which is better?
So firstly, we will look at some of the key differences between stock trading and investing. So, without any delay, let’s get it started.
What Is Stock Trading?
As the name suggests, stock trading is associated with purchasing and selling stocks, various commodities, bonds, currencies, or financial instruments. Stock trading is usually an investment for a shorter period. The main motive of stock trading is to generate profit through the short-term fluctuation in these financial instruments. So in simple terms, we can say that stock trading is all about taking advantage of the market volatility.
Stock traders use various technical analysis tools and chart-based techniques to analyze the movement in prices of any of the financial instruments mentioned above. By doing so, traders manage to capture short-term opportunities and generate returns higher than their investments. You can try several trading strategies, a popular one being day trading, which means
buying and selling the assets within the same trading day.
What Is Stock Investing?
Investing is all about purchasing stocks or bonds for a longer time to generate revenue out of it. As such investment involves a lengthy period, investors tend to buy stocks and bonds of companies expected to grow. Therefore, investing requires thorough research and selecting the appropriate stocks or bonds. In this case, investors do not sell their stocks or bonds regularly. They try to balance their portfolio by investing in several shares and bonds to generate a long-term return. The main motive behind investing is to slowly and gradually build wealth.
During an economic recession, it is likely that an investor tries to hold their stocks. Investing offers a great alternative to keeping your money in savings accounts since you can get high returns from your long-term investment.
Stock Trading vs. Investing – What’s The Difference?
Now, we know the exact definitions of Stock Trading and Investing, it is time to pick out some of the key differences between them. Some of the key differences between stock trading and investing are as follows:
1. Investment Period
Stock Trading is a short time investment, which involves holding any stocks, various commodities, bonds, currencies, or any other financial instruments for a few days, weeks, or months. On the other hand, investing is holding stock or bonds for a longer duration, ranging from a year to several years.
2. Risks Involved
As stock trading is for a shorter period, the risk involved in this type of investment is usually very high. On the other hand, investing is less risky, as it is for the long term. Any day-to-day fluctuations can’t impact it very much.
3. Investment Approach
Stock Trading is a short-term investment plan, where investors try to buy stocks when their prices are low and sell them when the price for the same goes up. To do these, traders monitor the market activity frequently to identify the best opportunity. Investing doesn’t require you such an approach as they are usually for long periods.
A good investor should have enough patience to sit tight and hold their investments for a prolonged period. While trading involves short-term investment and the risk is on the higher side here. Thus, traders need to have a refined trading strategy and the ability to think off their feet. Using various technical analysis and making the right decision on the move is a must-have. Even if everything goes according to the strategy, the result can go wrong in stock trading. So, traders should be ready to accept the potential risks involved in stock trading.
5. Capital Requirement
As you know, having a demat and trading account is a pre-requisite for trading. As traders want to earn big profits through price fluctuations, they often trade in several stocks and also require more capital. Investors don’t require such a large amount of capital to invest in the stock market.
Stock Trading vs. Investing – Bottom Line
These are some of the differences between Stock Trading and Investing. Which option is best for you? This depends on your financial needs and other requirements such as your personality, psychology, preferences, decision-making ability, and risk appetite. So, think wisely before trading or investing your hard-earned money.