Trading vs. Investment; Which one should you choose?
Investing and trading are two very different methods of attempting to profit in the financial markets.
Investing is used by investors to achieve higher returns over a longer time. Traders, on the other hand, use both rising and falling markets to enter and leave positions more quickly, resulting in smaller, more frequent profits.
So what should you choose?
In this article, we’ll discuss the differences between trading vs. investment and what could be the lucrative option for you.
What is Trading?
Buying and selling stocks or other securities in a short period to make quick profits is referred to as trading. Traders think in terms of weeks, days, or even minutes, whereas investors typically think in years. Stocks, commodities, currencies (forex), and other financial instruments are common trading examples.
Traders are divided into four groups:
- Position Trader: Positions are kept for a time ranging from months to years.
- Swing Trader: Positions are held for a period ranging from days to weeks under swing trading.
- Day Trader: Positions are held and sold within the same trading day
- Scalp Traders: Positions are held for seconds to minutes at a time.
The fundamental principle of trading is to “Buy low, sell high”.
Experience traders also use strategies such as reverse trading and short-selling, in an attempt to make bigger profits.
What Does ‘Investing’ Mean?
Traditionally, investing involves the purchase of stocks or other financial instruments that are intended to provide profits over a long period of time. Stocks, bonds, funds, and other investment vehicles are the most popular choices for investing.
Market fundamentals, such as price-to-earnings ratios and management projections, are often more important to investors. An investor aims to build a well-balanced portfolio of stocks and bonds that provide returns in the form of price appreciation, dividends, and interest income.
What are the Key Differences Between Trading and Investing?
Here are the key differences between long-term investing and trading.
Investing is a strategy based on the buy-and-hold premise. Investors invest their money into the market for years, decades, or even longer.
Whereas, trading involves owning stocks for a short period. It could be for a week or even just a single day.
Investing is the practice of building money over time using price appreciation and dividends of high-quality equities in the stock market.
On the other hand, traders keep an eye on the market’s stock price change. Traders may sell their stocks if the price rises. Simply said, trading is the ability to time the market.
Investing takes time to master since it is an art. It has a lower risk and lower return in the short term, but if held for a longer length of time, compounding interest and dividends result in higher returns.
Trading, on the other hand, has a larger risk and bigger potential reward in the short term because the price might go high or low in a short time.
In investing all financial decisions are based on an investor’s belief in the company’s expansion plans.
Traders tend to ignore what the company does in favor of focusing solely on the stock price and trade frequency.
Investors conduct their study and invest only once they are entirely convinced of a company’s potential.
Stock trading is more inclined to invest in stocks based on suggestions from friends, other stock market traders, the media, and other third-party sources.
What are the Pros and Cons of Stock Trading?
There are benefits and drawbacks to trading summarized below. Let’s start with the pros:
The difficulty of waiting a long time for rewards has been avoided-thanks to online stock market trading and share trading platforms. You can virtually instantly execute a trade using online platforms. When trading stocks in the stock market, time is of the essence, the ability to execute online trading portals quickly is a benefit to many stockholders.
Low – Commissions
Thanks to recent advances in computing and the internet, large commissions on any trading stock are now a thing of the past. Online stock trading is an appealing option in terms of economics, with the most advanced trading technology and the lowest commissions.
And here is the biggest disadvantage of stock trading;
You May Lose money Easily
Many people believe that trading is the simplest way to profit in the stock market, but it is also the simplest way to lose money.
A study by the U.S. Securities and Exchange Commission of forex traders found 70% of traders lose money every quarter on average, and traders typically lose 100% of their money within 12 months.
What are the Pros and Cons of Investing You Must Know?
Let’s start with the reasons why individuals should invest in the stock market.
1. Long-Term Returns
Investing is likely to yield favorable long-term returns. Historically stocks have outperformed all assets in the long run. While the stock market has always been volatile, it has always recovered from downturns, corrections, and crashes.
For instance, in the last 50 years, the S&P 500 has had an average annual return of 10.83%. This means, if you had invested $10,000 into an S&P 500 fund in 1970, the investment would be worth $2.13 million today.
2. Hassle-Free Buying
The introduction of discount brokers has made it easy to buy stocks. All you need is a brokerage account. Once you are done creating an account, you can buy stocks instantly.
3. No need for an Investment Degree
One of the biggest pros of stock investing is that it does not require an investment degree to be successful. You can invest passively and still have nearly the same returns as the stock market as a whole.
S&P 500 index funds are ideal for investors who prefer to take a passive approach to investing. When you buy in an index fund like this, you’re investing in hundreds of equities all at once. You don’t have to bother about researching which stocks to invest in or choosing whether to buy or sell specific shares because the fund does all of that for you.
Disadvantages of Investing
Here are the cons of investing you cannot ignore;
1. Requires patience
You can get wealthy with stocks, but it will take years or decades. So, if you’re looking to get rich overnight, sorry but that’s not going to happen.
2. Stock Market is Volatile
The stock market is indeed volatile. It has always risen through time, although not in a straight line. There will be lots of corrections and crashes along the way. Thus, you must have the courage to not panic and sell in a panic when they occur.
3. You Might Break Your Bank
Another but important demerit of stock investing is that if you don’t know what you’re doing, you could lose a lot of money, if not all of it. There are numerous methods to lose money in stocks, as well as numerous common investment blunders to avoid like purchasing equities on a margin using borrowed funds, being unable to pay off high-interest debt before beginning to invest, predicting the market’s movement, and more.
The approaches, risk, and time involved in investing and trading are the most significant distinctions. Investing is a long-term strategy with lower risk, whereas trading is a short-term strategy with high risk.
If reducing exposure to volatility and achieving long-term returns are your primary objectives, long-term investment is the way to go.
What are the Key Takeaways?
– Investing is a long-term gain solution to the markets that are frequently used for things like retirement plans.
– Trading entails using short-term techniques to increase profits on a daily, monthly, or quarterly basis.
– Traders will want to make transactions that would help them benefit rapidly from volatile markets, whilst investors are more inclined to look for long-term gains.
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