Investing and trading are two stock market dynamics that every investor in the stock marketplace ought to be acquainted with. Although both terms have been used interchangeably on different occasions by investors, still investing and trading in the stock market hold different meanings. This article intends to discuss the difference between investing and trading in the stock market.
Table of Contents
What is Investing?
Investing is the act of putting money into a financial venture or shares buying with the expectation of achieving profit over time which sometimes could be years.
What is Trading?
Trading is simply the process of buying and selling securities to make a profit.
Similarities between Investing and Trading
In the stock market, investing and trading hold a common aim by investors. And usually, the goal is – to make a profit. Now, this is one reason investing and trading have often been confused to mean the same thing.
- Another similarity between investing and trading is that both processes involve opening an account for the buying and selling of securities and also offer the advantage of choosing several investment types.
- Investing and trading both use compounding. This implies that returns earned in both can be further reinvested to earn more returns. In as much as this is a similarity between them, compounding works better for longer timelines( which can be attained through investing) and not shorter timelines which is what trading is about.
Difference between Investing and Trading
The primary difference between is the time factor.
Time
Investing requires a long-term approach. It can take several years and can span decades and profits are earned from interests and dividends reinvested etc. Investors in the stock market who invest are more concerned with the PE ratio (price to earnings ratio) and not with the market fluctuations as investing is long term and the price will soar again over time. While Trading has a shorter time length and it deals predominantly with stocks, bonds and currencies. Trading is concerned with making more profit in a short period hence the idea of buying when the price is low and selling when the price is high.
Fundamentals
Another difference is that investing considers the fundamentals of the company being invested in; from the financial history of the company, the performance of the company during a macroeconomic situation and research on the industry where the company relies on. Trading, on the other hand, is dependent solely on the company’s figures and how it is affected by trends in the stock market.
Risk
Trading calls for close monitoring of the company and how it is affected by market fluctuations, this enables traders to buy and sell at a time considered suitable and this itself is a high risk. Investing is not bothered by this. Investing waits for a longer period and has lesser risk.
Profit
Trading is known to earn better profits because it is concerned with selling at a time the security already owned is selling at a high price. Most investing options do not incur high profits but the risk of losing money is minimal.
Final Thoughts on the differences between Investing and Trading
Investing and trading are good ways of growing money whether in the long haul or short term. Investing has a longer time approach with lesser risk and sometimes fewer profits made when compared with trading whose profits are high but the risk is greater and works on a shorter time length. However, I must say how much profits and risk incurred in this approach is entirely dependent on the individual choices and decisions made in the process.