Trading vs Investing

Updated on March 26, 2024
Article byVivek Shah
Edited byVivek Shah
Reviewed byDheeraj Vaidya, CFA, FRM

Differences Between Trading and Investing

Trading refers to buying and selling stock regularly to earn a profit based on market fluctuations of price, whereas investing refers to a buy and hold strategy of investments for a long period where investors can earn based on interest and reinvestment over some time.

You must have surely heard about people making money from the stock market. Although there are a million ways to do so, we have two broad classifications of stock market activities- Trading (who believe in reading charts) and Investing (who believe in fundamentals of valuation over a long-term period).

Before we get into the specifics of trading vs. investing, let’s understand the difference by looking at the two most influential people in the world of wealth creation, one is known for his long-term investments, and the other is a renowned trader. If you are a stock market follower, you might have already guessed the names; they are Warren Buffet and George Soros. Both have made huge piles of money in the stock market over their lifetime, but differently.

Warren Buffet is worth about US$67 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.

Conversely, there is George Soros, whose net worth is about US$24.2 billion, who has made money from a countless number of trades.

“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.

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Which is Better: Investing or Trading? in Video

 

Trading vs. Investing Infographics

Let’s see the top differences between trading vs. investing.

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Key Differences

Pros and Cons

Trading stocks is much more time-consuming and frantic compared to making investments. Once you have made sound investments, you can relax without buying or selling for months/years in the case of investments.

A quote that signifies this difference-

Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson

What should you do Trading or Investing?

Try answering the following questions for yourself, and you could probably know if trading is the thing for you or investing.

Problem with Doing Both

What when the investments don’t go as per our plan? It is when some of the biggest errors happen. People tend to confuse the investing approach with the trading one and head towards danger. When the stock price is doing well, neither the trader nor the investor has any problem. But what happens when it does not?

Let’s say the stock price starts falling. As a trader, you would have an escape to avert the small losses from becoming big ones. Since, as a trader, you are not emotionally attached to the stock, you will get rid of it at the correct point in time. It is rightly what a trader should do.

But there is a problem if you decide to keep the stock and do not want to give up on it. So here, the trader has become an alleged investor who does not have enough information on the company to decide on holding the stock or letting it go. As an investor, you would be working on the guess. Similarly, being an investor, you are not supposed to sell off the stock when the prices go down but believe in the fundamentals and hold on to the stock.

Regardless of which one of them is a better strategy, you should pick one or the other and stick to it.

Comparative Table

CriteriaTradingInvesting
IntroductionRefers to buy and sell as per the price movementsRefers to buying and holding the securities for a certain period of time
Investment PeriodGenerally, the investment is short-term in this type of activity, and there are quick entries and exits.While here, investment is for the long term, and exit is far off from the entry point.
Capital GainsThere are short-term capital gains and only associated with the upside in the security price.Long-term capital gains can be earned with the upside and in the form of dividends and bonuses periodically.
Risk and methodologyThe risk is very high since it is a short term investment.Risk is lower comparatively as the investment duration is long
Types of securitiesOnly securities or stocks can be traded since there is quick entry and exit.Different types of assetsDifferent Types Of AssetsAssets are the resources owned by individuals, companies, or governments expected to generate future cash flows over a long period. There are broadly three types of asset distribution: 1. Based on convertibility (current and non-current assets), 2. Physical existence (tangible and intangible assets), 3. Usage (operating and non-operating assets)read more can be invested in a portfolio like stocks, bonds, notes.
The intention of the investmentThe motive is to earn profits and exit the position.Value investment is made on the company’s functionality, banking on the company’s fundamentals
Profits Risk is high, so generally, returns are high too.Limited returns and the profits are reinvestedReinvestedReinvestment is the process of investing the returns received from investment in dividends, interests, or cash rewards to purchase additional shares and reinvesting the gains. Investors do not opt for cash benefits as they are reinvesting their profits in their portfolio.read more to buy additional stocks.
Tools used for analyzingTechnical analysis tools like moving averages and the candlestick method are used.The company’s financial ratios and fundamentals are analyzed like the P/E Ratio and EPS.
Investment StrategyTraders buy the stock to sell at the upside and short sell to buy at a lower price.Investors buy the securities to hold and reap the benefits of the company’s growth.
Protection from investmentTraders typically follow strict stop losses, ensuring that they are closing out the loss-making positions at a pre-decided price.Stay put when the prices go down and bank on the company’s performance to do better in the future and recover the current losses.
Tax PatternShort term capital gains tax is levied on these returns, and the rate is based on your income bracket and is comparatively higher than long term capital gains.Long term capital gains tax is applied on these returns for which the rate can be as low as zero if the returns are yielded after a long period of time.
Investment ProductsStocks and Options: You can buy and sell easily on an intraday basis and earn the difference.Stocks, Bonds, Hedge fundsHedge FundsA hedge fund is an aggressively invested portfolio made through pooling of various investors and institutional investor’s fund. It supports various assets providing high returns in exchange for higher risk through multiple risk management and hedging techniques.read more, Mutual funds, Exchange-traded funds (ETF)
Cost involvedFrequent buying and selling of these securities mostly happen in the brokerage accountBrokerage AccountA brokerage account is a taxable investment account in a brokerage company where a person deposits its assets and instructs the company to trade in shares or bonds on their behalf. In addition, the company deducts some brokerage or commission.read more, and on every transaction, a brokerage is charged.With a limited amount of transaction, the brokerage fees are also limited.

Why are Trading and Investing Both Important?

Both are interdependent, wherein without the existence of traders, investors will have no liquidity to buy and sell a stock. Without investors, traders shall have no origin from which to buy and sell. Hence, it isn’t easy to decide which one is superior.

If everyone were an investor, no one would be willing to sell or buy in the short term, leading to an unhealthy market scenario. In the end, it is liquidity that tends to smooth out market prices.

Conclusion

Suppose we have to summarize the entire discussion on trading vs. investing. In that case, traders are the ones that take advantage of the market conditions to enter or exit their positions on stocks over a short period, taking smaller but much more returns. In contrast, investors strive for larger returns over a long-drawn-out period by buying and holding stocksBuying And Holding StocksThe term "buy and hold" refers to an investor's investment strategy in which they hold securities for a long period of time, ignoring the ups and downs in market price during a short period of time.read more.

It is not much of a concern that you are trading or investing, and it’s just that you need to be engaged in a chase that suits your personality traits, capabilities, and philosophies. I hope you enjoyed reading this information as much as I did writing it.

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Comments

  1. JP says

    Trading seems more suited to my lifestyle. I’m a little impatient and being able to see smaller returns on frequent trades, rather than watching paint dry, investments. lol. Swing trading, looks like it would suit me.

    • Dheeraj Vaidya says

      :-)