Trading Vs Investing ! Differences between Trading and Investing|
When it comes to wealth creation in stock market, investing and trading are the two genres of the field. Trading (who believe in reading charts) and Investing (who believe in fundamentals of valuation over a long term period). Investing and trading are two different methods of profiting from the financial market. I have seen many people use these words ‘trading’ and ‘investing’ quite synonymously. But in the real world, these two are quite different except for the fact that both of them are a part of the same market and have a common objective of making a profit.
If you are a follower of the stock market you might have already guessed the names, they are- Warren Buffet and George Soros. Both have made huge piles of money over their lifetime in the stock market, but differently.
Warren Buffet is worth about US$85 billion who made his money off long-term investments in companies whose stocks he has held for decades. Let’s look at one of his famous quotes.
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett
|WARREN BUFFETT GEORGE SOROS
Conversely, there is George Soros whose net worth is about US$8 billion after donating US$18 billion to open society foundation. Who has made money from a countless number of trades in stock market.
“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected”.-George Soros
While investing is a way of building wealth by buying and holding a portfolio of stocks for a long period of time, trading involves frequent buying and selling of stocks, profiting from sudden changes in the price, largely influenced by demand and supply factors and general market sentiment. This is simply the difference in investing and trading. To learn the same in financial markets, let’s learn differences between investing.
In trading, traders look at the price movement of stocks in the stock market. If the price goes higher, traders may sell the stocks. Simply, trading is a skill of timing the market whereas investing is an art of creating capital by compounding interest and dividend over the years by holding quality stocks in the market. The successful investor Warren Buffett says money doesn’t grow overnight. ” No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant. ” So your investment planning should be done by considering longer terms goal.
Let’s learn it this way, investing is a test cricket match while trading is T-20 match. You would watch skillful players in the team who are expected to strike fours and sixes to score higher in a T-20 match. Whereas, the art of the game is seen in the test match! Similarly, traders are skilled, technical individuals who time the market and learn market trends to hit higher profits in the stipulated time. It is related to the psychology of the market. Investors, on the other hand, analyze the stocks and found fundamentals analysis they want to invest in. Investing also includes learning business fundamentals and commitment to stay invested for a longer term. It is related to the philosophy that runs the business
both trading and investing imply risk on your capital. However, trading comparatively involves higher risk and higher potential returns as the price might go high or low in a short while. Since investing is an art, it takes a while to develop. It involves comparatively lower risk and lower returns in a short run but might deliver higher returns by compounding interests and dividends if held for a longer period of time. Daily market cycles do not affect much on quality stock investments for a longer time.
Trading is a method of holding stocks for a short period of time. It could be for a week or more often a day. The trader holds stocks till the short term high performance, whereas, investing is an approach that works on buy and holds principle. Investors invest their money for some years, decades or for an even longer period. Short-term market fluctuations are insignificant in the long-running investing approach.
Traders put money in a stock for a short term. They buy and sell fast to hit the higher profits in the market. Missing the right time may lead to a loss. They look at the present performance of the companies to hit the higher price and book profits in short term. Investors keep themselves away from the trends and invest in value. They invest for a longer period of time keeping an eye of the stocks they hold. They patiently wait until the stock reaches its potential. Ultimately, the ones who achieve their financial goals are successful.
Going back to our story, you are the one to decide if trading the seeds at a higher price making a smaller profit in a short time is your goal or holding on and growing more seeds to sell at a much higher price, in the long run, is what you aim for.