Trading and investing are the two methods of wealth creation from the stock market.

They are very different approaches to wealth creation and earning returns in the stock market.

Here are 7 key differences between trading and investing.

Trading vs investing: what is the difference?

Definition

Trading

Trading in the stock markets involves buying or selling of stocks to gain a profit from the fluctuations in the market price.

Though trading is seen as a risky activity, successful traders have a systematic process in place that is well suited to them and works for them. 

Investing

On the other hand, investing is the study of listed companies, their quarterly/annually financial performance and evaluating the probability of the stock price of the company rising over periods of time.

Investing is of broadly of two types:

  1. Value Investing: Here investors look for undervalued stocks based on company performance and their own interpretation.
  2. Growth Investing: Here investors buy or sell stocks after evaluating the potential growth trajectory of the company over a period of time.

Period

Trading is a method of holding stocks for a shorter period of time.

It could be for a day or a week but more often a day i.e. traders hold stocks till the short-term high performance.

Whereas on the other hand, investing is a method that works on the buy-and-hold principle.

Investors invest their money for a few years, decades or for an even longer period depending on the individual’s investment goal.

Short term fluctuations in stock markets are insignificant in the long-term investing approach.

Wealth Creation

In the trading method, traders only look at the price movement of stocks in the market. If the price rises, they may sell the stocks immediately.

So, trading is skill of timing the market right whereas investing is an art of wealth creation by holding stocks of quality companies, listed in the market.

Risk Factor

Risk is omnipresent in the financial world; the crux is how you manage it in accordance with your goal.

Both methods of trading and investing imply risk on your capital.

However, trading comparatively involves higher risk as it gives higher potential returns as the stock price might go high or low in short term.

Investing is an art which involves comparatively lower risk along with lower returns in the short term but might deliver higher returns by compounding interests and dividends if held for a longer term.

Market cycles on daily basis do not affect much on the price of stock investments for a longer time.

Skill vs Art

Let me explain this with an analogy from the cricketing world.

Trading is a one-day cricket match of just 50 overs while investing is a test cricket which goes on for 5 days each day having 90 overs.

You see skillful players in the team of one-day cricket match who are expected to strike fours and sixes to score as higher as possible.

Whereas, the art of the game is seen in the test cricket match. In a test, the cricket team player knows the art of patience, perseverance, confidence, and plays for the longer goal.

In accordance with the analogy, traders are highly skilled and technical individuals who time the market right by learning stock market trends to hit higher profits in the stipulated time.

Investors, on the other hand, analyse the stocks of companies they want to invest in by learning their business fundamentals and commit to staying invested for a longer term.

Time Commitment

For trading, you will need to spend at least 3-4 hours a day. I used the word ‘at least’ to stress that trading ends up being extremely time consuming.

Trading, especially day trading, is most rewarding when the market is active for stocks i.e. when the stock market opens or market inching towards closing minutes.

Investing, on the other hand, is quite flexible as a majority of the time is spent in the research of company.

But you will have to put work into developing your investment strategy at first. Once that’s done, investment is relatively easier to find stocks that fit your financial goals.

So, you could be spending a few hours a week or even in a month to find right stocks.

Personality

Both trading and investing require discipline approach. Only you have to develop a strategy in both methods and then stick with that strategy.

There is no doubt that trading is demanding. Your finger is always on the trigger, and you might be attracted into trading when you shouldn’t.

Choosing to trade or to invest

First, you need to determine how much time you are willing to devote to your financial goal.

If you have all the time in the world to go through financial statements of companies, conducting background checks of stocks, going through projections and growth charts as well as being ready to play with market dynamics then you may consider either trading or investing.

It is advisable that you check the company’s foundation which includes its financial background, consistent growth trajectory, and past income statements.

You also need to look out the company’s leadership structure and how it is performing against its competitors in the sector as well as well as identifying projects that it is planning to undertake which you think will make the company’s stock perform well in future.

Whether you choose to trade or to invest one thing is for sure, that you will have to put in some hours and energy from your side.

Don’t have time for either? There’s another way:

Mutual Funds

The other way to invest in stocks is via mutual funds.

Mutual funds come in many types and categories.

Mutual funds that invest in shares are called equity mutual funds.

They are excellent for people new to the stock markets.

In mutual funds, you basically outsource your stock investments to an expert. The expert is called a fund manager.

He will manage your money and ensure you get good returns. This is in exchange for a small fee called the expense ratio.

You do not even need a demat account for investing in mutual funds.

You can sign up on Groww (Android app, iOS app, and website) in minutes and start investing.

Learn everything you want to learn about mutual funds here: Beginner’s Guide to Mutual Funds.

Conclusion

In stock market, trading and investment are the 2 sides of the same coin.

Finally, the ones who achieve their financial investment goals are successful.

So, you are the one to decide if trading the seeds at a higher price making a smaller profit in a short term is your financial goal or holding on and growing more seeds to sell at a much higher price in the long term is what you aim for.

Happy Investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.