There are different ways to solve a question in mathematics. It doesn’t matter which method you choose, as long as you arrive at the correct solution. Investing in the stock market is also similar; you can choose from two different strategies to maximize your profits. One of them is trading, while the other is investing.
What is Trading?
Trading, in the securities market lingo, is the act of buying or selling shares of a particular company in a short period of time. Stock traders are highly active when the market is open, and sell or buy shares of a company as soon as they sense an opportunity. Once the share deviates from its price in either direction, they sell or buy it. The goal of stock traders is to maximize profits in the short term.
What is Investing?
When someone tells you that they’ve invested in the stock market, what they really mean is that they pumped their money in the market at some point in the past hoping to make returns. They could have bought a company’s shares a long time ago, and might not have sold it even after earning huge profit.
What’s the difference between the two?
Now that you have a fair idea about trading and investing, let us see the key differences between them.
- Time spent in the market
Traders and investors pump in their money in the stock market for different periods of time. A trader does so for a short period, using it to buy shares that he/she quickly sells. An investor, meanwhile, stays loyal to the market for a longer duration. His or her money will remain in the market for days, months, or even years. Traders, typically, keep their money in the market for a couple of trading sessions.
- Holding behaviour
Holding a stock isn’t easy for traders. They look and deal in rapid price movements, so the odds of them holding a stock for days or weeks is low. As for investors, they can easily hold a stock for months or years. Unlike traders whose aim is to make quick profits, investors aim for wealth creation. To do so, it is imperative that they hold a stock and let it achieve its potential over time.
- End goal
Traders and investors enter into the market with different goals. A trader looks for immediate returns, which is why he/she buys and sells shares quickly. Investors, meanwhile, are looking to create a corpus. So they’re prepared to stay invested in the market for a long time.
- Risk capacity
There’s a huge difference in the risk-taking ability of the two types of market participants. Traders have a higher risk appetite, since they’re prepared to handle the volatility of markets in the immediate term. Investors are slightly conservative as they don’t mind holding a stock even when it’s going down.
Which is better: Trading or Investing?
The simple answer to that is: it depends on the person you’re talking to. Some people have a higher risk appetite than others, so they’re more likely to say trading is better. It is important to evaluate your needs and your behaviour between choosing to trade or invest.