In this article, we are covering the difference between trading vs investing. We have to see it with clarity that both trading and investing does have the same goal of earning profit. However, there are fundamental differences between investment and trading. The difference lies in “duration” and that plays a crucial role.
The Characteristics of Investment (While comparing Trading Vs Investing)
Simply, investment is a long term activity. Here you invest a certain amount of money expecting the benefits in the long run. As we know that all economic activities that require capital. It takes some time to build a sustainable profit-making business model.
Generally, investment is passive. Usually, it means that you take the efforts to do research and analysis before taking the investment decision and then you just have to track the performance of your investment. There is no other active task for you as an investor unless you want to make any changes in the investment.
The risk involved in investing is generally less than that of trading. You take the help of fundamental analysis while doing research regarding your investment.
Pros of Investment
- It is less stressful as compared to trading because you have to pay constant attention to the performance of the market.
- This is less time consuming as you are not required to constantly track your investments.
- Also, it is tax saving so you can utilize the profit to invest and earn returns. The government has levied a lesser tax rate on the long term investments.
Cons of Investment
- Not everyone can maintain patience and investment is all about patience. You have to wait for the returns and it might not be easier to just wait and watch for most of us.
- The investor might take the wrong decision and hence it might result in the loss even after waiting for years.
- The time required for research before making an investment decision is much more as compared to that of trading because you have to analyse the past track record of years and decide the investment strategy according to that data.
The Characteristics of Trading (While comparing Trading Vs Investing)
However, when it comes to trading. It is more volatile in nature as the time period is usually much lesser as compared to that of investment. It can be a few seconds, a few hours or the entire day.
In some cases, trading is exactly the opposite of investing, it is more active. As a trader, you have to constantly keep an eye on the performance of the trade and keep doing necessary changes in it.
Profit and loss depend on multiple factors such as your timing of entry and exit, the capital invested and leverage of it etc. If you are doing it properly, the chances of earning profit increases. No one knows what will happen in the future so, with the help of a few methods, you can do educated guess and invest or trade as per the research. On the other hand, you will lose a significant amount of money if you are not doing any research and trading blindly.
Pros of Trading
- It is a comparatively faster method of earning money. You can earn profit even if you are trading for a few minutes. Yes, it takes much more time to gain knowledge and experience to take the correct decision.
- While trading, you can get quick data to understand if your strategy is working or not. You don’t have to wait for months to see the results. It helps to quickly improve the strategy based on the results.
Cons of Trading
- Volatility is one of the biggest opportunity yet the biggest risk. Things can change in a fraction of seconds and you might not even able to execute your planning so you have to be active throughout the trade.
- It is generally more stressful as you have to make crucial decisions in less time as compared to that of investment and it decides if you are going to earn a profit or not.
Infographics explaining Trading Vs Investing
How to take the decision in Trading Vs Investing
While managing funds for investment or trading, you must understand whether you want to take short-term profits with small profit margins and risks or long-term with larger margins and risks. Yes, there are some advantages and disadvantages in trading vs investing but make sure you are making the decision as per your ability, knowledge and experience.
This will help you to decide whether you want to become a trader or an investor. You can also act simultaneously as an investor and trader if you know how to change the roles without taking any stress.