We all have heard of the terms Investing and Trading. Obviously, they are both very closely related to stocks. But did you know that there is a HUGE difference between these two? And choosing the wrong one will most likely make you lose a huge fortune.
What is investing
Investing is the more complicated version of earning money. It involves tons of research, long hours of reading through reports, going through financial indicators, doing a lot of calculations, Investing means finding out fundamentally strong stocks so and building up a strong portfolio in a way that it survives the market conditions.
There are many types of investments available such as Stocks, Bonds, Commodities, Real estate, etc. We will be diving deeper into what they are in future articles, right now our focus is on stocks.
Stocks are a great way of creating wealth, if you have read the book “rich dad poor dad” this is one method of making money work for you.
What is trading
Trading is a high-risk method of investing in stocks. It is short-lived but will be able to deliver good returns in a short period of time. You might think that trading is a simpler way, but there are different methods of trading such as,
Scalping
This is a short-term method of trading that lasts a few seconds or minutes. This can be trading on stocks or crypto where a massive amount of volumes are traded per day. It is not applicable to most of the markets.
Day trading
This is a method mostly used in stock markets, it’s when the trader takes up a position and avoids holding it for a long term and pretty much exits in the same day.
Swing trading
In this method the trader holds his stocks for several days, it can be for up to weeks as well. Swing traders also utilize different strategies such as trend trading, counter trading, etc. Swing trading is abundantly seen when a market rally starts to happen. It’s a very good method of getting some profit in the short run.
What sets apart trading and investing
Trading and investing are two completely different fundamentals where both of them have their own pros and cons. Investing is something very long term as we mentioned before and trading is short-term. The risk of trading for both of these methods has a drastic difference. Typically the risk of trading is high as it is short-term and is highly volatile, and the risk of investing is high but when compared to trading it is very low. With good background research and careful fundamental analysis, you will be able to further reduce this risk of investing.
What option is better suited for you
Are you debating whether you should invest or trade? Well, let’s go through some points that would really help you in making this decision.
Risk Apettite
This is a very personal factor that will change depending on each individual. We all have different risk appetites, some prefer to take higher risks while some prefer to take calculated risks and others prefer to take little to no risks.
Investing in defensive counters (stocks that won’t fall even during adverse economic conditions) is one such way of having little to no risk. This is a good method for people who prefer low risk. Do keep in mind that low risk means the reward will also be very low. So for such people trading is not recommended its best for them to invest in fundamentally strong stocks.
For people with a high-risk appetite, it’s best for them to utilize methods such as swing trading or even day trading is recommended. It will prove a high return in a short period of time. But keep in mind that in order to get a high return you need to invest a significant amount.
At all times you should keep in mind that the highest returns and the safest returns are gained through investing and not trading. So do your own research and choose the best method according to your risk appetite,
Liquidity needs
Different people have liquidity needs. Liquidity is the ability to turn assets into cash. Investing is long term so the liquidity of investing is very low, if you withdraw some cash from your savings account and decided to invest in a long term stock then suddenly you need the cash. In such instances, you might want to sell these stocks but the profit you might have expected might not be there. So you have to carefully consider investing vs trading and access your liquidity levels and decide which is suited for you.
Investing vs trading, by now you must have a sound idea of both these two prospects. It all comes down to your risk appetite, your cash available, your liquidity needs, and the return you expect. I hope this article was insightful, trade with care 🙂