People often use investing and trading synonymously. But, there are 2 very different approaches to making profits in the stock market. Trades and investments both aim to capture gains from an asset. But the time for which the asset is with you is different. Traders and investors have short term and long term perspectives, respectively.
This blog explores what is investing and what is trading, the key differences between investing, and what is more suitable for you.
What is investing?
The goal of investing is to build wealth by buying and holding stocks that will give out attractive dividends or whose stock price will increase from the initial buy levels. Typically, investing involves holding an asset for a few quarters, years, or decades.
With long-term investments, the decision to sell off a stock depends on the company’s perceived long-term profitability and not the short-term fluctuations in stock price.
Nowadays, anyone can invest. You do not need lakhs of rupees to start investing. You can start with less than ₹1,000. You can invest in India’s stock market through stocks or ETFs if you have a Demat account, and if you don’t have a Demat account, you can still buy mutual funds.
Discover stocks that suit certain filter criteria and dive into details to check their WealthBaskets.
Among the various styles of investing, 3 of the most popular ones are:
- Value investing – Investing in companies with a market value lower than their perceived real value
- Growth investing – Investing in companies expected to grow (mostly higher than the industry and related peers) over the next few years
- Investing for dividends
What is trading?
The goal of trading is to make profits from short term changes in the stock price. Typically, traders hold an asset for a very short period. They usually sell off the asset within a year and sometimes within minutes.
One of the benefits of online trading is that it has made transactions faster and cheaper. However, trading is still not as accessible as investing. Trading in the Indian stock market requires you to have a Demat account. Additionally, investors generally need a higher amount of capital to trade using futures and options.
There are different types of traders in the stock market. We can classify them based on the holding period of an asset.
| Holding Period | Type of trader |
| Seconds to minutes | Scalp Trader |
| A day | Day Trader |
| Days to weeks | Swing Trader |
| Months to years | Position Trader |
Key Differences Between Investing And Trading
While the holding period of a stock indicates whether you had an asset for trading or invested in it, there are other differences between investment and trading. This section discusses some of the key differences between trading and investing.
- Risk
In comparison to investing, trading is assumed to carry a higher risk. This is because short term fluctuations are generally difficult to predict. Trading profits are dependent on your ability to predict short term stock price fluctuations. You need to predict if the market will change its mind about a stock’s valuation and how long it will take for the market to shift the stock price.
On the other hand, investing requires you to shortlist businesses that will grow in the future, as per the investor’s analysis of the company’s fundamental and macro understanding. Difficult to predict short term fluctuations have a limited effect on investments. - Reward
In theory, trading would have a higher reward than investing. Investments may take longer to pay off. Trading has the potential to payout within short periods, sometimes even in a single trading session. You can get compounding benefits (by earning additional income from the income you’ve earned already). Since trading can potentially give returns more frequently (and in a shorter time period), you might get better capital benefits from trading, in comparison to long term investing. However, since fluctuations in a short period tend to build stress and uncertainty, traders may find it difficult to stick to their positions and short term analysis based on various tools. - Holding period
As we mentioned earlier, trading involves holding an asset for a short period. Typically, traders may not hold an asset for more than a few weeks, and some might even hold an asset for just a few minutes. Investing, on the other hand, has a longer holding period. It takes time for a company to grow and reap benefits for the investors. - Skillset
Investing requires you to shortlist stocks that will grow in the future. This involves learning which businesses are being managed well, which businesses are positioned well within their industry, finding if the external factors are favourable, and how long will it take for the company to grow. So, fundamental analysis, as this is called, is of importance for investing.
Trading, on the other hand, requires you to predict price movements. Technical analysis is better suited for this job. Technical analysis assumes that prices move in patterns and counter patterns and that prices are already reflecting the true value of a company at all times.
Who should trade? Who should invest?
As investing involves a deep dive into the business of a company, it generally involves a lot of time and understanding. On the other hand, predicting price movements in short term requires a high amount of skill, especially when it comes to using a lot of technical tools. Difficulty in predicting price fluctuations tends to go higher as holding periods get shorter. There are numerous factors to consider while trading. You must strategise and execute in a very short period (when it is time to exit position), in order to meaningfully generate profits.
Investing requires you to understand which businesses will grow in the next few years, and you would have a longer period for strategising and execution.
Traders and investors have different requirements of skill and capital. Trading the stock market requires a higher amount of capital. Investors need to be good at fundamental analysis, while traders need to be good at technical analysis.
Which is more profitable trading or investing?
Some people may be better at investing, and some may be good traders. Whether investing or trading will be more profitable will depend on psychological factors and skillsets.
Who should invest in the stock market?
Investing in the stock market can be done with low amounts of capital. You may start investing with as little as ₹1,000. With SIPs, newcomers can invest without worrying about price fluctuations. People who would like to actively pick stocks must study and understand fundamentals, to make a better decision.
On WeatlhDesk, you can browse through various WealthBaskets. With WealthBaskets, you can invest in portfolios created by SEBI registered professionals. Every WealthBasket has an investment strategy and theme.
FAQs
Traders are people who try to make money from short term fluctuations in a stock’s price. Investors are people who try to make money by buying stocks that they expect to grow in the next few years.
Whether you will make more money as a trader or investor depends on your skillset and psychological factors. Trading involves more risk and requires you to perform technical analysis. Investing has a comparatively lower risk and requires you to perform fundamental analysis.
A person can be a trader of one stock and be an investor in another stock. However, doing this would require you to understand both trading and investing and organise your actions to don’t mix up the two activities.
Trading has a higher level of risk and higher skill requirements than investing, as time horizons are short. It may also needs more experience and practice, in comparison to investing. Trading is by no means easy.
