Stock Trading vs. Investing: What’s the Difference?

Trading and investing are two common ways to enter the stock market. These are two very different methods of attempting to make profit in the financial markets. However, it’s common for people to conflate these terms or to use them without understanding the differences between them. So, in this blog, let’s address your confusion one last time and look at these two terms separately to understand the difference between them.

What is Stock Market Trading?

Trading is characteristically linked with buying and selling of stocks, bonds, or other financial instruments with a short-term horizon. So, you will be considered a trader if you are someone who frequently buys and sells with the intention of making profit in the stock market from small changes in the pricing. The trader may hold a stock for no more than a few months. Or, you may think of a trader as someone who is considerably more concerned with short-term objectives than long-term ones. They hold stocks for weeks, days, or even minutes.

Types of Trading

Trading can be broadly classified as follows: 

  • Day trading 
  • Scalp trading 
  • Position trading 
  • Swing trading

Day Trading: This type of trading is best suited for someone with extensive market expertise. Day traders prefer not to hold their shares for more than a day. They buy stocks in the morning and sell them before the end of the trading day so that no overnight risks are involved. Day traders become quite active when the market is volatile.

Scalp Trading: This is a style of trading where a trader attempts to make numerous small profits by buying and selling several times during one single day in order to earn profit from the price difference. They try to make small profits in each and every trade and all the small amounts finally add up to make a substantial gain. These traders hold their position for a few seconds or a few minutes and make a profit out of the smallest opportunity. Scalping is a work of focus, discipline and decisiveness.

Swing Trading: This is a style of trading that attempts to capture short-to mid term gains from the price swings in the market. Swing traders, unlike intraday traders, hold their stocks over a period of a few days to several weeks. They rely heavily on technical indicators to look for trading opportunities and determine the best time to purchase or sell stocks. To increase their chances of making a profit in the short-term, the traders must act swiftly to seize the opportunities.

Position Trading: This is a style of trading wherein a trading position is held for a long period of time (generally a few months or weeks) to make profit. A position trader buys and holds an investment for a prolonged period with the expectation that it will appreciate in value and looks for the right time to sell their securities. Hence unlike others, the position traders focus on big price movements ignoring minor price fluctuations that might happen in the market.

What is Stock Market Investing?

As you have understood about trading, now let’s learn about investing and its type in detail. Contrary to trading, investing demands years of hard work and consistency. In the words of Warren Buffett, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” Investing is the process of purchasing and holding a portfolio of stocks or any other financial instruments with the intention of gradually building wealth over an extended period of time. So when you buy stocks, bonds or other financial instruments with a long-term horizon, it is called investing.
Long-term holding of your investments can result in much better returns. Investing is mainly driven by intense fundamental (and some technical) analysis of potential investment targets and sticking with them as they grow.

Types of Investing

Here are some of the major investment approaches utilised by most of the investors:

Passive investing: As the name itself suggests, these investors put their money in particular security and forget about it. It is a long-term strategy for building wealth by buying securities that mirror stock market indexes. So if you’re a passive investor, you invest for the long haul and try to mirror what the stock market is doing.

Active Investing: Active investing refers to a strategy that involves frequent purchasing and selling activity by the investor typically with the goal of making profits and outperforming average index returns. Active investors buy securities and constantly keep a close eye on their activity to exploit profitable circumstances.

Growth Investing: Growth investing is an investment style and strategy where the prime focus is on capital appreciation. It is essentially the process of investing in sectors, companies, or industries that are expanding now and are anticipated to do so for a considerable amount of time.

Income investing: This is an investment strategy that involves building a portfolio of assets specifically structured to generate a secondary path of income for the investors. The sole objective of the income investing approach is to produce a steady flow of income.

Trading vs Investing

The goal of both traders and investors is to make a profit. However, they take up different paths to fulfil it. They also have certain distinguishing features. Let’s see them in detail.

Particulars Trading Investing
Time Period Time Period Trading is short term ranging between minutes to months. Investing is long term ranging between a year to a decade or more.
Market Volatility During period of high market volatility, traders are highly active. The portfolio of investors is less affected by shortterm market fluctuations.
Style of Analysis Technical analysis is performed. Fundamental analysis is performed.
Market Knowledge Traders should hold immense knowledge about the market. Investors need to be more informed about the growth prospects of the company, industry, and economy than the market.
Risk It is highly risky. It is less risky than trading.

So which one is best suited for you?

In order to trade actively, you will be required to have a high-risk profile. You should feel comfortable with taking losses and working in highly variable conditions. Additionally, trading takes a lot of time, which can be exhausting for someone who has a full-time job. Having said that, trading may be the ideal career for you if you enjoy and feel comfortable when you are actively employed in the markets. On the other hand, while investing, you must choose the best stock and hold onto it. If you have no prior knowledge and experience, even then you can construct a strong portfolio. All you need is an objective, a sound plan of action, and research.

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