When it comes to earning profits in the financial market, investment and trading are the 2 options widely selected by people. As investment and trading both seek profit through market participation, sometimes they are often confused to be the same. Investment and trading are two different genres in the financial sector. On one hand, where the investors use fundamental analysis, the traders use technical analysis to buy or sell.
In this article, we will extensively discuss the difference between investment and trading so that you get to know the difference and choose which tactics are more suitable for you.
What Is Investing?
Investment, as the name suggests is traditionally related to buying financial instruments such as, stocks, mutual funds, bonds, etc. that are expected to gradually build wealth over a long period, say, years or even decades.
For better returns, an investor needs to invest in the financial instruments of companies that are expected to grow over decades and not deplete. Thus, this process of investing in the right instrument involves intensive fundamental research about the investment target.
The ultimate aim of an investor is to create a balanced portfolio with selective financial instruments that give returns through an increase in the value as well as interest income. So, the day-to-day fluctuations in the funds are less important and the consistency over an extended period is considered in the long run.
What Is Trading?
Unlike investments, trading involves frequent transactions such as buying and selling of financial instruments like stocks, commodities, bonds, etc. The primary focus of trading is to make profits from short-term movements in the prices of these financial instruments.
Trading profits are generally generated by buying bonds, stocks, etc. at a lower price and selling them at a significant high within a relatively short period. Short-term transactions usually refer to immediate transactions or transactions that last weeks or months. The length of time between buying and selling is called the holding period.
This frequent buying and selling require technical analysis under which trading system or chart-based techniques are used to detect short-term patterns in prices.
Investment Vs Trading
The main difference between investment and trading is that the former requires long-term investments while the latter involves short-term transactions.
Let us understand the difference between investment and trading in detail so that it helps us take a make financial investment decision.
Period
Needless to say, time period plays an important factor while differentiating between investments and trading. While investment works on the principle of buying and holding for the long-term, trading involves short-term holdings with instant high returns.
In investing, the money is invested for decades and sometimes even more, whereas, in trading, the holdings could last for weeks or even days.
Capital Growth
Investment involves intensive study as it is the art of creating wealth by compounding interest and dividends over years by holding right and beneficial financial instruments.
Trading, on the other hand, is a skill of timing. The right buying and selling of stocks, bonds, or any other financial instrument at the right time, makes or breaks a trader.
Risk
Risk is common with it comes to both investment and trading. However, if we think, trading involves a bit higher risk than investment as it takes place on a short-term basis. In investment, one has time to study and make the correct analysis about a certain company and its performance which is difficult in the case of trading. Quick decisions involve greater risks than deeply analyzed decisions.
Returns
As the risk involved in trading is higher than investment, so follows the returns. A trader, because of taking quick decisions lands up being involved in much higher risk leading to big profits and losses.
An investor, comparatively takes lower risks and offers lower returns in the short-run but might deliver higher returns if invested for the longer term.
Let us see the table below to understand the difference between investment and trading:
Trading (Buy and Sell)
Investing ( Buy and Hold)
A trader looks for instant benefits
An investor is slow and steady in approach
Decisions are taken within minutes, days, weeks, months
Decisions are based on long-term intensive study and hence ranges from years to decades
Right timing plays an important role in profits and losses
Short term market volatility does not affect the consequences of returns
Stock selection strategy is based on technical analysis
Stock selection strategy is based on fundamental analysis of a business
Requires real-time data and information to buy and sell financial instruments
There is a relaxed disposition, information only regarding fundamentals is required
Company's background does not play a major role and trading focuses on the scrip price and trade volume
All the decisions are based on the company’s growth prospects
Has more risk appetite with a penchant for short term gains
Possesses lesser risk appetite comparatively, invests for the long haul
Generally, the decision is based on recommendations by friends, other stock market traders, media, and other external resources
Complete research about the company is done. The company's past, present, and future prospects are kept in mind while investing
Summing It Up
Investing and trading are two different methods to achieve your ultimate financial goal. Your choice depends upon the nature of the business you like to invest your money in and the amount of time you are ready to devote. As long as you know how much money you are ready to put on risk and have a plan in place, you can enjoy the benefits of investments, trading, or a mix of both and balance your portfolio accordingly.
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^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.
#The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CARG 8%; ₹50,45,591 @ CAGR 4%
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