Trading vs. Investing: Basics 101
We hear these terms — trading and investing — a lot nowadays. Almost everyone around us uses them. But do you know what they exactly mean?
So let’s get started!
Trading and investing are two separate ways by which people participate in the stock market intending to make money. The people who do trading are called traders and the ones who focus on investing are called investors. There are also a bunch of people who do both trading and investing!
The key difference between trading and investing is that trading is for the short-term while investing is supposed to be long-term.
Trading
When it comes to trading, traders try to take advantage of both rising and falling markets to make a profit. They do this by going “long” when the markets are rising and going “short” when the markets are falling.
Traders follow a trading strategy that lets them enter and exit trades in a shorter time frame. Their trading strategy mainly uses technical indicators which help them get precise entry and exit price levels.
There are four main styles of trading based on the holding period of a particular trade. They are as follows:
- Scalping: Trades are held for seconds to minutes.
- Intraday: Trades are held for a day and are not carried to the next day.
- Swing: Trades are held for a few days to weeks.
- Positional: Trades are held for a few months to years.
The two key factors that help the trader to choose their trading style are the capital they are planning to put in and the amount of time they are ready to devote.
Investing
When it comes to investing, investors focus on buying and holding their investment portfolio (which may include stocks, mutual funds, bonds, cryptocurrency, etc.) to build wealth over a long period of time. They are not concerned about the day-to-day movement of their investments and only focus on the long-term results.
Investors hold on to their investments and let compounding do its magic! They take advantage of things like dividends, interest, and bonus shares. The strategy that investors usually follow is “buy and hold” and that is why they focus on the fundamentals of the financial instrument and give less importance to the technical indicators.
When you decide to trade, you will have to allocate some amount of capital upfront for your trading activities. Whereas in investing, you can invest as and when you have funds available.
Trading and investing can both be done full-time or part-time. That is something you will have to decide. While making that decision make sure you consider every factor (time availability, capital availability, etc.). Make a plan on how you will conduct your trading/investing activities.
Lastly, whatever you do — trading or investing — make sure that you don’t mix them. They are both different methods and that is how it should be!
If you have any questions, please comment below or get in touch with me on social media. Cheers!
