Difference Between Investment And Trading.

The world of finance is full of confusing terms, and trading and investing are often used interchangeably. But both these point towards different things. If you look closely, you'll find that there are a lot of differences between trade and investment, and as a beginner, you should know each of them to choose the right path. So let's first learn about each of them, and then we will keep them side by side to know the differences.

What is Trade/Trading?

Trading involves buying and selling of shares, stocks, and other securities to make short-term or medium-term gains. Trading is suited for people who can actively manage their portfolios and have some experience in the market.

Also Read: 6 Common stock trading mistakes you should avoid.

Having known about trading, let's understand what investing is.

What is Investing?

Investing is based on a longer horizon of buying and selling shares and other securities. Investing is ideal for people who don't have much free time and like to manage their funds without many risks passively.

Also Read: How To Start Investing?

By now, you know both these terms, so let's differentiate between them to get a clearer idea.

Four Basic Differences Between Trading And Investing

Time Span

The number one differentiator between trading and investing is the time span involved. In trading, the time span is significantly less compared to investing. Traders are of multiple types, and at the most, they keep their positions open for two to three weeks.

Whereas investing is done by people who like to hold on to their securities for numerous years. Many investors even buy and hold stocks for up to decades too.

Level Of Risk

Another differentiator that can help you determine your money management style is the level of risk. Trading involves high risk as it is short-term, and a drop in the market for the short term can wipe out your capital too.

On the other hand, investing is less risky because you keep buying securities on your way. Moreover, short-term trend changes hardly affect your long-term investments. Most experienced traders take this to their advantage and hedge their positions by investing large sums for the long term and taking smaller short-term trades.

Returns

Trading involves quick returns. As you are in and out of your positions in the short term, you tend to miss out on more prominent movements in the market. On the other hand, investing can give better returns, as you stay invested for the long term and gain more from the movement in the market.

If you are experienced in the market and know your way around with strategies and tools, you can consistently create returns and outperform investors.

Also Read: How To Limit Losses And Book Profits?

Analysis Involved

Another differentiator point between trading and investing is the type of analysis involved in it. While traders often rely on technical analysis and indicators, investors use fundamental analysis to make decisions.

Technical traders leverage chart patterns and different market analyzing tools that help them to catch market movements instantly and buy and sell securities. Investors use the underlying company's performance, balance sheets, assets, and other fundamentals to decide on buying and selling the stock.

Now, it is time to look at the pros and cons of both these types.

Pros Of Trading

1) Shorter time span is involved

2) Ability to generate good returns in short time.

3) Helps you make multiple trades with lesser capital.

Cons Of Trading

1) Highly risky.

2) You cannot capture large market movements.

3) Requires skills and intensive practice to generate good returns.

Having known about trading, now it is time for some pros and cons on Investment

Pros Of Investment

1) Helps you create generational wealth with patience.

2) Allows to catch large market movements

3) Does not require highly intensive practice, and much skills.

Cons Of Investment

1) Requires significant investment to generate good returns.

2) You need to be highly patient in growing money.

3) With small capital investment, returns might not be good, and to generate passive income, you need to invest considerable amount of money.

Whether you are a trader or investor, finding the best stocks takes a lot of effort. Once you do this, you can make consistent returns from the stock market. The market rewards patience and time in the market is better than timing the market, so if you are keen to grow capital exponentially, always choose the path of investing.