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You might have heard people making bulk of money from the stock markets. Who doesn’t like to earn well? We all love making money. Right! You might also be thinking to grow rich and create a substantial wealth through stocks or shares. So, here we shall be discussing two broad classifications in the stock market world that can help you explore some fairly good returns: Stock Trading vs investing.
Stock Trading and Investing are sometimes used interchangeably. But, in reality these are two entirely different approaches with a common motive of generating profits and building wealth in the financial market. So, you need to know the basics of how to start investing or initiate trading to get better results.
Before that, checking the difference between Stock Trading and investing becomes quite essential.
Investing vs trading: Two perfect examples
While beginning our discussion, the two biggest names that surely need a mention here:
Warren Buffet, the greatest investor who accumulated wealth through his long term value investing strategies in the stock market. His famous quote: “I will teach you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
Conversely, George Soros created piles of wealth through his belief and skills of trading in the stock market. He says, “Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected”.
Stock Trading vs investing: 6 Key Differences you must know
Before putting your money in, you should know the fundamental differences between Stock Trading and investing. Understand the purpose why you buy a stock and where your money is going and what you can expect in return.
Stock trading is primarily focused on generating returns by actively buying and selling of shares. Whereas, investing lets you accumulate wealth over a period of time by holding the investments (shares) for a longer duration.
2. Holding Period:
In trading, you hold stocks for a shorter period may be a week, a day or few hours or few minutes as well. So, traders simply buy and sell fast. While, Investing follows the principle of “buy and hold for long”. Investors might keep a stock for few years, sometimes decades or even longer. As an investor you invest in value, keep a watch on the stocks you hold and patiently wait till it reaches its full potential.
3. Market Performance:
Short term market fluctuations form the basis of trading. Traders expect share prices to move in a particular direction and gain or lose from the situation. Whereas, the daily market cycles and short term risks are insignificant for the long term investor.
A Trader earns profits by timing the market i.e. buying shares at lower price and selling them at a higher price. A trader needs to keep an eye on price movements in the market to gain more profits. A small miss can lead to losses. While an investor earns through the compounding interest principle. An investor tries to hold quality stocks and expects the company to perform well in future and declare handsome dividends.
Both, trading and investing imply certain degree of risk on your capital. However, trading often involves higher risk as compared to investing. You may get to see significantly high or low prices in a short while that can impact your earnings. While investing lets you assemble wealth over longer periods thereby lowering (not eliminating) the risk factor.
6. Strategy & Skills:
Traders need to be aware of the daily market trends and develop good technical skills to time the market and grab higher profits. Investors should know the basic fundamentals and benefits of staying invested for longer periods.
We can sum up by saying, Trading is a skill and Investing is an art! How? Trading involves timing the market, which surely is a great skill to be learnt gradually. However, investing is an art of creating wealth by following the correct strategy and earning from the magic of compounding.
What should you choose: Trading or Investing?
Both, trading and investing are crucial for the stock market to survive. So, whether you trade or invest, do it based on your interest, knowledge and financial goals.
Now, that you know the actual differences between Stock trading and investing, you can surely take a wise financial decision. You are the one to decide if making short term profits is what you enjoy or holding stocks longer shall fulfil your dreams.
Analyse your priorities for establishing a good financial portfolio. Investing or trading, whatever you do, just stay informed and keep enhancing your investment and trading skills.
Do you give importance to financial planning? How about building a retirement corpus through systematic planning? What would you prefer doing: Stock Trading or Investing? Do let us know!