Trading Vs. Investing: Difference Between Stock Trading & Investment
What is Trading or Stock Trading?
Stock Trading is the process of buying and selling shares of a particular company. If you own the stock, it is like you own a piece of the company. It prioritizes short-term profits over long-term profits. And giving you a heads up, never dive into it without the knowledge of it.
But making this clear, not everyone who buys and sells stock is a trader. It depends on how frequently a person buys and sells stocks. And these aspects are divided into traders and investors, based on the investment languages.
Stock traders are the ones who buy and sell stock to capitalize on the daily price fluctuations. They are also the ones who bet they can make a buck over their investments in a few minutes.
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These Stock Traders are Largely Divided into two types:
Active and Day Trading. Active trading is when an investor places ten or more trades per month. Typically, they are the ones who use a strategy that entirely relies on heavy market timings. Day trading is a method adopted by investors who play the hot potato with stocks. It is buying, selling, and closing their positions of stock on a single trading day.
What is Investing?
At times stock trading and investing might seem like the same thing, but they are not. Investing is a way of potentially increasing the amount of money. The ultimate goal is buying financial products, which are called investments. Investments include everything like stocks, bonds, mutual funds, and annuities.
How are Stock Trading and Investing Different from Each other?
Both trading and Investments entail the process of looking for profits in the stock market but pursue that very same goal in different ways.
Stock Traders are the ones who jump in and out of stocks within weeks, days, and even hours. All of it, at the aim of short-term profits. They focus on a stock’s technical elements rather than the company’s long-term potential.
Investors, on the other hand, have a longer-term outlook. They are more likely the ones who think in terms of years, holding on to stocks through the market’s ups and downs. Investors dive into studying a company’s potential for long-term growth, but traders take advantage of current prices to make moves at the moment.
In general, investors look out for larger returns over an extended time span through buying and holding. In contrast; traders take advantage of both the rising and falling markets to enter and exit positions over trading in equity.
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Key Elements that Vary Both these Attributes:
Period – Small-term market fluctuations are insignificant for investors but can impact the trader. All of this is because trading is the process of holding stocks for a short period of time, and investing can vary in the time period from a year to even a decade or more.
Capital Growth – When prices of stocks get higher, traders may sell these stocks. Without a doubt, trading is a skill of market timing evaluations. Whereas investing is the art of creating wealth in compounding interests and dividends over a long period of time.
Risk – Trading and investing imply risks on capital. But trading comparatively involves higher risks and a higher rate of returns. Since investing is a long-term art, it takes a while to develop.
The Art Vs. The Skill – Trading is more like a one-day cricket match, whereas investing in test cricket. You can watch skilful players in the team expected to strike fours and sixes much higher in a one-day cricket match. On the flip side, the art of the game is only seen in the test match. Traders are skilled people who time the market and learn market trends to hit the jackpot. Investors analyze stocks that they want to invest in, at the same time learn the business fundamentals.
The Pros and Cons of Stock Trading and Investing:
Stock Trading: Without a doubt, the online stock market has revolutionized the window of opportunity for traders. But the key to success in the wide arena of the stock market and equities is knowing the benefits and the risks of the market. So here are some of the greatest advantages to leverage and risks to look out for.
- Save Money – The best way to save money if you are looking for short-term profits is with stock trading.
- Make Money – Trading is extremely easy once you get a hand in the market. Returns on cash are volatility ensured through the roof.
- Earn Dividends – Even if the stock does not rise in high value but there is an assured viable option on dividends. Stocks may not steadily rise but they do earn steady dividends.
- Cut Down on Costs – With online trading on the rise, cutting down on brokerage charges and bringing forth a flat rate for every transaction.
- Control the Process – Only trading ensures that you have 100% control over the process rather than placing fate in the hands of market decision-makers.
- Rid the Middleman – 2021 is a time where you can make all your moves first hand. Trading gets complex once you use a middleman and even a costlier option. But you can get hold of the whole process now.
- Lack of Expert Advice – Modern days and online trading has left you to be the jack of all trades. You can seek no one’s but your very own advice for stock trading.
- Jumping in Head First can be Harmful – Today stock trading is more reachable than ever. Jumping in without the pure knowledge of it can be a high-end risk.
- Online Trading can be a Little Complicated – At most times people do not have hands-on expertise over a new application or new technological process. How to operate certain types of software or analyze complicated graphics can be hard in the beginning.
- Loss can be Real Even When it is Virtual – Trading in the virtual world may feel like you have eyes on your fluctuating market, but it’s time to let it sink in that at times risky slips happen.
Investing: Investing is always meant to hold a position for more than a year. So here are some advantages and disadvantages of an investing strategy.
- You Need to be Least Active – Investing is so far one of the platforms with the least activity of the owner. It is a good path for people interested in markets but do not want to make it a part of their routine.
- Lower Tax Rates – Holding a position for more than a year allows you to tap into capital gains tax, which is lower than the tax rate of short-term capitals.
- Slow Process – If you are looking into the aspects of making profits soon, investing would not be a chosen way. Investing involves putting capital into a long-term return [generally over a year].
- Lower Returns – As investing involves reusing the same capital, and the annual returns are generally not as good as a professional trader.
What is better – investing or trading is a subjective and relative term. It depends on each individual’s wealth expansion goal.