Trading vs Investing: The Ways to Participate in the Market

Everyone has a dream, be it to send their children abroad for higher education or to buy their first home. The Indian stock market has ways to fulfil dreams such as these as you have opportunities to trade and invest and potentially make money. Coming back to investing and trading, although the terms are used synonymously, they mean different things. For instance, a trader approaches trading with short-term returns in mind whether they employ intraday trading strategies or any other method of attaining profits quickly. In contrast, true investing is done from a long-term standpoint, by earning substantial returns over a long period. 

Whether you see yourself as a trader, investor, or both depending on your life’s circumstances, you should know the difference between trading and investing

Trading and Investing – Fundamental Differences

The main aspect of the difference between trading and investing is the element of time. When you invest in something, an asset, say a stock, you hold it for a long term as it may give you capital gains and a source of income like dividends. Your aim here is capital appreciation and potential income generation along the way. The objective of an investor is the creation of wealth. 

On the other hand, trading is a way to invest in an asset, but the goal of this strategy is to make short-term gains. Traders typically buy and sell stock within a short timeframe with the expectation that they will make profits. The objective of a trader who may employ intraday trading strategies is to make quick gains and undertake more trading activity with those gains, attempting to make more profits. 

Trading vs Investing – Key Points of Distinction

You could be a trader or an investor based on your profile and unique orientation. It is worth diving deeper into certain elements of the difference between trading and investing: 

 

  • Objectives

 

The objective of investing is to create wealth over the long term, holding assets and bearing out market downturns and upheavals till your assets earn you a substantial profit. True investors execute a buy-and-hold strategy, typically investing in blue-chip companies that have a way of remaining resilient over long periods and ultimately earning gains for their investors. 

The objective of trading is to make short-term profits and use these to make more trades possible. One of the most prolific ways of making quick gains in the stock market, trading may make use of a range of strategies from intraday trading strategies to scalping and swing trading tactics. 

 

  • Risks

 

Investing is considered by those investors with less of a tolerance for risk than traders as investment is done over the long term. In investment, markets may undergo downturns, but eventually bounce back and stocks may become profitable over the long run. 

Trading is more of a risky proposition, but a way to make quick profits compared to investing. For instance, a trader may employ intraday trading strategies, attempting to make profits within a single trading day, but this may be risky as time restrictions are involved and positions must be closed at the close of a trading session. The risk is high in trading as markets tend to be more volatile in shorter periods. However, trading can take place in bullish or bearish markets depending on the skills and strategies of the trading style and the trader. 

 

  • Tools Employed

Investors may use different tools to pick stocks and other securities for long-term investment. These tools include everything from knowledge about companies and sectors to other mechanisms of fundamental and technical analysis. Investors may combine tools for investment outcomes and these involve looking at a stock’s past performance over time and comparing it to a benchmark index. 

Traders use many tools and strategies for trading including taking exit and entry positions,  identifying target points, and deciding on stop-loss before trades take place. Trading involves different ways of handling trades in a limited time and coping skills to work under pressure and make decisions quickly. 

Choose How to Earn in the Markets

While both investing and trading can make you potential profits in the Indian financial markets, the means to do so differ for both these ways to generate returns. Trading and investing require discipline and involve different approaches to earning profits. The key difference between trading and investing lies in the time horizon for earning returns and this must be considered while choosing one over the other. 

Trading vs Investing: The Ways to Participate in the Market