Investment vs Trading: Check the Differences & Which is Better?
Money saved in a bank account might not yield more than 5-6% interest per annum, which is a meagre amount if you consider inflation. As a result, investment and trading have become popular options for decent returns. Both are profitable avenues where you can deploy your money, generating returns for you over the tenure.
However, since investments and trading offer higher returns, there are various risks associated with them. These risks are most commonly related to market fluctuations. Investors and traders may even lose their money if they invest without proper research. Therefore, before investing, you must carefully analyze your options to pick the financial instrument that is best suited for you.
Read through to understand the differences between investment vs trading and know which is better for you.
What is Trading?
Trading is usually for a short-term, where the trader buys and sells financial instruments for a decent gain. For example, an individual can buy stocks. Later, once they see that the stock value is increasing, they can sell them to gain higher returns. The profit in trading lies in the fact that the difference between the buying and selling price of these stocks is significant. The profit for the overall trade may be higher but not necessarily per stock basis. This means that if one buys any stock in large volume, even a small increase in price may result in large profit but per stock the movement might be small in price.
When compared to other standard investment options like FDs, this profit is way higher. However, there are downsides to trading too. Profits are never guaranteed. There are chances that the stock prices fall due to external factors. In that case, you may have to incur a loss.
Advantages Of Trading
- You can get back the money soon after trading.
- The visibility of how well a financial instrument is performing is better when it comes to trading. This is because the prices of these instruments change daily, and the price changes are kept public. This makes it easier for you to keep an eye on high-potential securities.
Types of Trading
Intraday Trading: This strategy is all about the same-day hustle. Traders buy and sell stocks within the confines of a single trading day. The objective? Capitalizing on short-term price movements. It’s a fast-paced arena that demands a sharp eye on charts, a knack for spotting patterns, and a high degree of discipline to navigate potential market fluctuations.
Scalping: The name of the game here is speed. Scalpers dive in and out of trading positions within minutes or even seconds. Their goal is simple: leverage tiny price differences for potentially quick gains. It’s a meticulous strategy that often leverages technology, like automated systems, but it’s not without its challenges. Higher transaction costs can be a concern, and laser-focus is essential.
Swing Trading: Think of swing traders as the middle ground between intraday traders and position traders. They don’t operate in the ultra-fast realm of intraday trading, but they’re not in for the long haul either. By holding stocks from several days to a few weeks, they aim to harness the momentum of “swings” in stock prices. It’s a strategy anchored in patience, chart analysis, and an understanding of market trends.
Position Trading: For those with an eye on the horizon, position trading offers a more extended engagement with the stock market. Traders here are in it for the long game, holding onto stocks for months or even years. They’re not swayed by short-term market noise. Instead, they base their decisions on in-depth analyses of economic data, industry trends, and other macro factors. It’s a method that demands a comprehensive understanding of market intricacies, paired with the patience to see their predictions play out.
Momentum Trading: Harnessing the power of momentum, traders in this category zero in on securities showcasing strong recent performance. Betting on the continuation of current trends, they use tools like moving averages and RSI to spotlight assets with robust momentum. Their focus? Price action, more than the underlying fundamentals.
Technical Trading: A deep dive into past stock performances guides technical traders. Through the lens of charts, patterns, and indicators, they forecast future stock movements, often relying on detailed technical analysis.
Fundamental Trading: The very essence of a company, from its financial standing to its industry performance, is the bedrock for fundamental traders. Their trades are influenced by a company’s intrinsic value, gauged by economic and performance metrics.
Delivery Trading: Old-school yet effective, delivery trading emphasizes ownership. Traders physically acquire securities, intending to hold them as long-term investments. The commitment here extends beyond a single trading day, with a focus on sustained ownership.
What is Investing?
Investment is a type of financial activity where an investor puts money in a financial instrument for a longer period of time. During that time, the investor will not have access to their money. Instead, the money will get a chance to compound with time. During this process, a profit is yielded, which can be taken out by the investor. Unlike trading, investing comes with a longer tenure. The longer the tenure, the higher the probability of profit.
Advantages of Investing
- You can expect decent to high returns if you from investing, provided you do proper research. However, market related risks are associated with them.
- As investments come with a longer tenure, your money will have a greater chance of compounding.
- The invested amount and the returns are transparent and assured in conventional options like FDs.
Types of Investing
There are a lot of investing types that are followed all over the world. However, it is these five that standout globally across the investing demographic. That being said, let’s take a look at them:
- Real Estate Ventures:
- Engaging in property transactions, either for generating rental returns or for capital appreciation. This can encompass residential or commercial properties and even trusts specialising in real estate investments.
- Equity Investments:
- Taking a stake in a corporation by purchasing its shares. The returns are twofold: dividend payouts and the potential rise in the share’s price. However, it’s subject to market fluctuations.
- Debt Instruments:
- By acquiring bonds, investors essentially loan money to entities, such as government bodies or big corporations. As a return, they receive regular interest and get back the principal amount when the bond reaches its maturity. Generally, they bear less risk compared to equities.
- Collective Investment Schemes:
- These are funds amassed from several investors to invest in a varied portfolio encompassing assets like stocks or bonds. They offer the advantage of diversification and are overseen by professionals, though they entail management costs.
- Tradeable Fund Units (ETFs):
- They operate much like mutual funds but can be traded on stock exchanges akin to individual equities. They provide broad exposure and typically have a more favourable fee structure in comparison to mutual funds.
Investment vs Trading
|Low risks compared to trading.||High risks are associated with trading.|
|Almost all instruments come with a long tenure.||Trading is flexible with respect to tenures.|
|Ideal time horizon is longer. You might have to incur loss if you sell your investments in the short term.||Very highly liquid; these instruments can be converted to money conveniently.|
|Less complex to understand and invest||Highly complex and difficult to understand|
Even though both concepts have their own advantages, the basic question which arises to many is whether trading or investment is better. Trading is suitable for short-term buying and selling. On the contrary, investments are long-term. Let us go through some more of the basic differences between investment and trading.
Both options have risks associated with them. However, trading comes with more risk as compared to investments. The reason is short-term buying and selling. When an individual buys stocks or shares, there are chances that the prices will drop in the course of a day. There is no assurance that the prices will be consistently rising. Most trading options have comparatively higher risks, while investments come with lower risks than trading.
Period of Investment
Investing in a financial instrument and waiting for the desired outcome is time-consuming. An individual might have to wait for years before receiving their invested amount along with gains. However, trading being a short-term option, gains can be immediately retrieved at the time of selling. The best way to do trading is to reinvest the money in other stocks to multiply your earnings.
As time passes, usually the capital grows with investments. But in the case of trading, there won’t be much appreciation of capital if you don’t trade properly. There is often a very low to moderate increase in capital. Very rarely, there might be very high capital growth. And this might be followed by a fall in profits. So careful analysis is needed before choosing the right trading option.
The amount of returns depends on the type of instrument chosen and its performance in the market. There is no thumb rule to compare investment with trading when it comes to returns. A few investment options can give very high returns, and a few trading options can give very low returns, and vice versa.
Style of Analysis
Proper research is needed in both trading and investing in financial instruments. However, the style of analysis varies between the two. For investments, the basic criteria for picking the right asset is based on a few factors. Risk, tenure, return, and liquidity form the basis for deciding which instrument to invest in. On top of that you have to perform fundamental analysis before investing in stocks. Similarly a careful market examination is needed to study the trend thoroughly. The rise and fall of prices should be carefully studied for a period of time, and the money should be deployed only then.
Similarities Between Investment and Trading
Both investing and trading aim to grow wealth in the financial markets, primarily through buying and selling assets such as stocks, bonds, and mutual funds. At their core, both approaches hinge on the principles of risk and reward.
While they offer the attractiveness of potential gains, they also come with uncertainties, stating that no strategy guarantees absolute success in the market. It’s this shared objective of profit coupled with the acceptance of possible risks that binds them together, regardless of their distinct strategies and time horizons.
Earning Compound Returns
Both investing and trading provide individuals with the opportunity to harness the power of compound returns. This is where returns on an investment earn their own returns over time, amplifying the growth of wealth. Whether you’re trading in the short term or investing for the long haul, the benefits of compounded gains can be realized, making it a compelling reason for engagement in the financial markets.
Opportunity to Earn Dividends
Another commonality is the prospect of earning dividends. Investors often purchase shares in companies that distribute dividends, providing them with a regular stream of income in addition to potential capital appreciation. Traders, particularly those involved in longer-term swing or position trading, can also benefit from dividend payouts, supplementing their trading income.
Both trading and investing serve as avenues to potentially outpace inflation. With the cost of goods and services steadily rising, merely saving money might not be enough. By actively participating in the markets, whether through strategic investing or tactical trading, individuals can aim for returns that exceed inflation rates, preserving and potentially enhancing their purchasing power over time.
Investment vs Trading – Which one Should You Choose?
Investment and trading both are great sources of income generators when done right. Each of them are great pillars of our financial ecosystem in their own right. Coming from a probability standpoint, long term investing can lead to wealth building when invested in blue-chip stocks and other well performing funds. Trading, in specific swing trading offers high returns but with high risk as well.
Choosing between trading and investing largely depends on your financial objectives, comfort with risk, available time, and understanding of the market. If you lean towards a less active role and have the patience for longer-term gains, investing may suit you best. On the other hand, if you’re prepared to dive deep into market analysis, handle fluctuating outcomes, and seek faster profits, you might find trading more appealing.
After learning about and understanding what is the difference between trading and investments, we can say that careful analysis is needed to choose between trading and investment. Having the money in a savings account is the safest option, but it will yield the lowest returns. However, money is not meant to stay idle. Rather, investing in various areas will promote its growth.
Frequently Asked Questions
- Which is riskier between investment and trading?
Trading is generally riskier than investing due to its short-term focus and frequent market movements.
- What is the difference between active trading and passive investing?
Active trading involves frequent buying and selling for quick profits, while passive investing focuses on long-term growth with minimal transactions.
- Are traders and investors the same?
Traders and investors are different; traders seek short-term profits, while investors aim for long-term growth.
- Which is more profitable, investing and trading?
Profitability varies; while trading can offer quick gains, investing tends to provide more stable returns over time.
- Can I get more profits on long-term investment?
Long-term investments, given the power of compound returns, can often lead to substantial profits over extended periods.