One of the many outcomes of the COVID pandemic was an increase in the number of traders and investors in the stock markets. India is estimated to have about 10 crore active Demat accounts today which is a huge increase from the previous 5 crores just a couple of years ago. However, many of these new entrants faced a crucial question to decide their primary role, whether to be a trader or an investor. Although both trading and investing are related to stock markets they both require different temperaments as well as skills. So how to choose between the two? Given below is the answer to this question.
Read More: How to pick a stock for investing?
What is investing?
Let us begin by understanding the basic meaning of the two. Investing is essentially a long-term approach to creating an investment portfolio. Investors can choose from an array of available options to park their funds for a medium to long-term investment horizon with an aim to meet their financial goals. These options include stocks, mutual funds, ETFs, gold ETFs, index funds, REITs, and more.
Investors are usually not affected by the short-term volatility of the stock markets and can maximize the benefit of compounding. There can be different approaches to investing like value or growth investing, passive or active investing approach.
What is trading?
Now coming to trading, it is a short-term approach toward stock markets with an aim to make quick returns and take advantage of the market volatility. The maximum time horizon for an average trader can be one day, one week, one month, and very rarely up to one year but not more than that. Traders need to have a lot of focus and grip on the changing market scenarios to determine the right time to enter or exit the market with profits or to avoid maximum losses. Trading is like a profession that requires a thorough knowledge of the craft and all its nuances as well as a continuous learning process. There can be different types of traders focusing on a particular segment of the market like intraday trading, F&O trading, scalping, delivery trading, and swing trading.
Main differences between trading and investing
After understanding the basic difference between the two, let us now focus on the key differences between investing and trading.
|Investment horizon||The average investment horizon, in this case, is usually between 3 years to 5 years for mid-term investment options but can also run into decades for investments with a long-term investment horizon.||Trading is essentially making the most profits from the short-term market fluctuations that can be between the opening and closing of a trading session or more. Traders aim to capitalize on the current market information at the same time are aware of potential losses and limit them by using a stop loss.|
|Risk||The risk assumed by an investor is usually lower as the increased investment horizon reduces the overall volatility in stock markets.||Trading is highly risky as it focuses on the short-term volatility of the market. This can result in potentially high losses if the traders miss the window of opportunity or if the markets do not react as presumed.|
|Tools of analysis||Fundamental analysis is the key to successful investing. Most investors also track the price movement of their target securities to understand the most opportune purchase or sale price but the core of investing is focusing on the quality of the stocks, management team, business model, product lifecycle, financial ratios, reports, etc.||Traders focus on the technical analysis of securities which is essentially the price and volume movements to track the buying and selling signals or the changing market trends.|
|Skills and knowledge||Although investing is not easy, it does not require the level of skills and knowledge needed that are necessary for a trader. Investing focuses on finding the right growth opportunities for the investment portfolio to increase and meet long-term financial goals.||Traders need an in-depth knowledge of the market and the securities to understand the market trends before taking a trading position. Trading, therefore, involves extensive study and use of charts to understand various charts, candlestick patterns, and other tools to analyze a stock or security.|
|Time and effort taken||The time and effort taken by an average investor to invest in securities are quite less as compared to an average trader.||Trading is like a full-time profession and requires a lot of time and focus to be successful.|
|Returns||The returns from investing can be quite high as investors get the benefit of compounding over the long-term investment horizon.||The returns from trading cannot be certain as traders may make higher returns on certain trades or may even potentially lose out their corpus on a single bad trade.|
|Capital appreciation||Investing aims at gradually increasing the capital base over the investment horizon.||Capital appreciation in trading requires a good amount of time as traders usually focus on making quick returns. Also, the risk of loss of capital is high which further reduces the chances of capital appreciation without correct market research and analysis.|
|Tax liability||The tax liability on long-term returns is lower which is also an added benefit of long-term investing.||Tax liability is higher in the short-term horizon for all classes of securities whether equity or debt.|
|Target investors||Investing is usually preferred by risk-averse or beginners in stock markets.||Trading requires an aggressive approach and hence is suitable for people with a higher risk appetite.|
Which will make you richer? -Trading or investing?
Comparing trading and investing is like a comparison between apples and oranges. These are completely different approaches to stock markets and have their own set of pros and cons. Therefore there is no clear answer to the above question. Trading and investing require a completely different skill level and mind frame as well as polar opposite expectations from the stock markets. There are many new tools and guidelines available today that can help a person be a better trader or investor. These tools not only help in better market understanding but also help in developing the mind frame that is suitable for trading or investing.
Trading is a very good option for professionals who have a clear understanding of stock markets and have the potential to be aggressive in risk-taking abilities. Investing on the other hand is a useful way to not only increase one’s wealth in the long term but also save tax along the way. Many successful traders also have an active investment portfolio and aim at meeting their short-term and long-term financial goals through each of them.
Yes. A Demat account is a mandatory requirement for trading or investing.
Yes, investing and trading are not mutually exclusive. A person can be a trader and an investor simultaneously.
Yes, trading is quite riskier than investing as there is a lot of speculation and also a high chance of errors in the same. Trading requires a good amount of skills and knowledge of the relevant market terms and strategies to have a successful portfolio.
Trading and investing are separate approaches to making money from stock markets. However, most experts believe that to be a successful trader one needs to start with investing first and understand the market before taking a plunge into trading.