As a new investor, you must have heard how people plan to profit from the stock market. When researching it, you will find a million ways to do so, but there are two basic types of stock market activities - Trading and investing. So, let's look at the difference between trading and investing.

Investing vs Trading - Table of Contents

What is Investing?

Investing is building wealth over extended periods by holding and buying stocks, mutual funds, bonds, and other investment products. Investments are held for some years or even a few decades, taking advantage of perks such as interests, dividends, and stocks split along the way. 

But markets start fluctuating, and investors' ride out' the downward trend, expecting the prices to bounce back and all losses can be recovered.

What are the Pros & Cons of Investing?

Before jumping into the difference between trading and investing, let's look at the pros and cons of investing.

Pros of Investing

• Growing in an economy.
• Staying ahead of inflation.
• Investment products are easy to buy.
• Does not need much money to start investing.
• Investors gain income from price appreciation and dividends.
• Easy liquidity of assets.

Cons of Investing

• Multiple risks are involved.
• If a company incurs losses then stockholders are paid last.
• Investment products need thorough research.
• Investors must incur taxes on profitable stock sales.
• Investors must also incur emotional ups and downs when the market changes.
• Must compete with professional and institutional investors.

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What is Trading?

Trading involves frequent transactions such as buying and selling stocks, currency pairs, commodities, and other instruments. The goal of trading is generating returns that outperform the buying and holding of investments. 

But, traders generally take a more significant risk to see more significant returns every month. Traders profit from buying at lower prices and selling at higher ones quickly. 

What Are the Pros & Cons of Trading?

Now that we know what trading is let us look at the different pros and cons of trading. 

Pros of Trading

• Trading stocks is easy and convenient as it can be done online.
• If played strategically and depending on risk taking ability, trading stocks can be highly profitable.
• Trading stocks is highly fluid as it can be bought and sold easily in the market.
• Has the option of price discovery based on the actions of buyers and sellers in the market.

Cons of Trading

• It is just as easy to make money in trading as it is to lose it.
• Trading in stocks has a higher tax liability than any other investment portfolio.
• Requires a higher learning curve and commitment.
• It is difficult to make any money when the market is highly volatile.

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What Are the Similarities Between Investing and Trading?

When it comes down to the basics, investing and trading are pretty similar. Both involve the buying and selling of investments, and each provides an opportunity to pick a range of investment options to help reach the investors' personal goals. 

Here are some other ways investing and trading are similar: 

1. Gain of Compound Returns: 

Compounding is when you start earning returns on investments, and those returns start getting returns. So, when you invest in the stock market, you can compound an investment value. So, as time passes, the power of gaining compound returns increases. 

2. Potential to Earn an Income: 

Specific investment options like individual stocks and funds offer periodic payouts called dividends. These dividend payments are offered quarterly and can add up to 0.5%-3% of the total share value in the year. 

In the case of certain investments, there can be a substantial portion of the total return or a percentage of their price increases as well as the amount provided from dividends.  

3. Main Goal is to Beat Inflation: 

Inflation is a hidden tax on investment that happens when your purchasing power goes down, and prices go up. So, when you trade and invest, the main goal is to gain positive returns. If they are high enough, then they can offset and beat inflation. This, in turn, helps you build your wealth.

Differences Between Trading and Investing

Now that we understand the similarities between trading and investing let's take a look at what are the differences between trading and investing:

1. Trading is often done by people who practice intraday trading and are always looking for the best growth investment opportunities. They can predict the low and high movement of the market.

On the other hand, investors look for value investment options. They plan to stick to these investments for a long time. 

2. In trading strategies, there is no hedge against the risks involved. This means that the money stakes are quite high without any protection in case the market falls.

On the other hand, investors take time to balance their investment portfolios properly. This is done so that the other funds will hedge the losses if a particular asset goes down. 

3. The market movement and indexes are primarily due to extensive trading activities, so a trader plays a significant role in the movement of market prices compared to an investor. 

4. Traders take into consideration the upside and downside of the market. They have multiple strategies like short sell, strangle, butterfly, etc. Investors generally have a more straightforward strategy - they hold the asset while investing. 

5. Returns are relatively uncertain and fast in trading, where stock buying and selling happen daily. But, an investor needs to wait longer to see any returns. 

6. Traders are more interested in everyday details and quarterly results as these bring a large amount of movement in stocks that offer an opportunity for traders. At the same moment, investors believe more in the principles and values of the company they invest in. 

Investing vs Trading - A Comparative Table

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Why are Trading and Investing Both Important?

Both trading and investing are interdependent; traders need to have the liquidity to buy and sell stocks. Also, traders do not have a place to buy or sell without investors. So, it isn't easy to choose which one is superior. 

If everyone becomes an investor, no one would want to buy or sell in the short term. This would lead to an unhealthy market structure. So, liquidity, in the end, helps smoothen out market prices. 

Trading or Investing - What Should You Do?

If you want to know if trading or investing is better for you, then answer the following questions: 

When planning your stock market activities, you must plan the time you can spend on them. Trading is better for you if you can analyze charts and graphs quickly and understand the ups and downs. But, if not, then it is better to stick with long-term investing. 

The equity research required for trading is more extensive than for investments. Trading involves much more hard work, especially in analyzing financial statements, the company history, and overall growth. Those who enjoy the fundamental market analysis should consider playing the market field. 

Consider your investor size and their goals. Investing in long-term stocks to grow your portfolio is better if you are a small investor. But, if you are a prominent investor and prefer short-term gains, trading is better for you. 

Conclusion

Suppose we have to summarize the entire debate on the difference between trading and investing. In that case, traders are the ones who take more advantage of the market as they easily enter or exit their stock positions in a short time. But they tend to garner more risk with higher returns. In contrast, investors stick on for extended periods and wait for more significant returns with reduced risk. 

Depending on which type suits your personality and business acumen, you can choose between trading and investing.