Investing vs Trading – Why people participate in the stock market or in the financial market?… The very obvious answer is to make a profit. The goal behind this is to build wealth over existing income. However Investing vs Trading, this can be achieved depending upon the duration and the position which they hold.
Investing vs Trading Infographics
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“INVESTMENT “ the word is quite lengthy, isn’t it?… Yes, it is. The meaning hidden behind this word is also long as the goal of investing in anything is to build wealth over a prolonged period of time through different ways like buying and holding the portfolio of stocks or mutual funds, bonds over a long period of time.
In a polished language Equity investing involves the building of a portfolio of stocks and managing its performance for an unbounded period of time. Thus whenever the expected performance is about to be achieved then suitable market actions are carried out. The time period can be off days, years or even decades with the advantage of interest, dividends or stock splits, etc. So basically the main aim is all about creating an income and achieving the growth.
Then how investors are defined? It’s very simple, individuals who do investments are called as Investors. These investors enhance their profits through compounding or reinvesting any profits and dividends.
In the situation of market fluctuation, investors drive towards the downtrends with the hope of bouncing back of prices. Thus with research on company fundamentals and other techniques like technical analysis one creates a portfolio of different stocks.
Types of Portfolios
Through research and fundamental analysis, one tries to create a balanced portfolio of different stocks.
Some sorts of portfolios are:
Index Tracker Portfolios
This type of portfolio is constructed in a manner to track a broad market index or a segment thereof. They invest in all or a representative number of the securities in the index. This portfolio will be set up in a manner to follow movements in those indices. For e.g. the S&P 500 index. This kind of investing is known as Passive investing.
High Dividend Portfolios
These are the portfolios that are made up of stocks with above-average dividend yields.
Blue Chip investment Portfolios
This consists of a highly recognized and financially sound company’s stocks. These blue-chip stocks are seen as a less volatile investment. These portfolios comprise of only top-rated stocks.
These portfolios are managed either actively or passively.
Passively Managed Portfolios
In a passive strategy of portfolio management, investment is done with a predetermined policy that doesn’t involve any forecasting. Here the idea is to minimize investing fees and to avoid the adverse consequences of failing to correctly anticipate the future.
Index portfolio which tracks the index movement as said above is a kind of passive portfolio management.
Actively Managed Portfolios
These portfolios are traded often. In this, the performance is less certain as it is dependent upon the decision making of the portfolio manager. The manager adventures market inefficiencies by purchasing the securities that are undervalued and short selling securities that are overvalued.
Trading is a more active and short-term strategy. It is all about buying and selling of shares or commodities or even currencies with the aim of making short to medium term gains, rather than long-term growth. The basic technique involved in trading is buying at a lower market price and selling it at a higher price within a small period of time or in a reverse way i.e. selling at a higher price and buying it again at a lower price to profit in dropping markets which are known as Short Selling. Traders need to be attentive to make profits within a time-frame they want to live in order to avoid losses. Hence they apply stop-loss strategy to automatically close the losing positions at a predetermined price level.
Traders also use Technical analysis as a tool to find high profitability positions. Traders are classified depending upon the holding period or timeframe in which stocks or commodities are bought and sold. They choose their trading style based on factors like size of the account, time to be involved in, risk tolerance capability, Personality and experience level.
Some types of traders are:
These traders buy (or sell) the stocks in any day and close the position for profits on the same day. They do not hold overnight positions.
These traders make a number of trades every day and hold positions from seconds to minutes and try to make a very small profit on each. They will also close the position quickly in order to limit the losses.
These traders look for the situation where there is a high volume in a stock that is moving decisively one way or the other and trade in line with that trend. They will watch for that momentum to ease and then take profits.
These traders look at the company’s fundamentals and hold positions longer than the other traders, but still looks for short to medium term profits and buys and sells actively in the market.
From above it can be concluded that whether it’s a day trader or swing trader, a trader is looking to take profits frequently.
Individual Stock Picking
Individual stock picking is a high risk-high return form of trading. Whether alone, or within a portfolio, it requires research to pick the cheapest undervalued stock for buying an overvalued stock for selling.
Stocks vs. Index
In this long or short positions are based on index based portfolios. In this, a contrary view index is taken for increasing the returns.
Market neutral trading
Market neutral trading is a strategy in which a trader seeks to profits from both increasing and decreasing prices in single or numerous markets. These traders who hold a market neutral position are able to exploit any momentum in the market.
Here is a small table that will give you a snapshot difference between investing and trading for beginners.
|Duration||Long-Term||Short-Term, a few days or even minutes|
|Why||With the belief that the company will do well in the future and come up with dividends and increased share price.||A share will move in a certain direction to achieve the target.|
|Objective||Making Money by holding shares.||Making money with often buying and selling of shares.|
|Analysis Tools||Fundamental analysis||Technical Analysis, Charts.|
|Return Expected||Investors invest with an expectation of a 10 to 15% annual return.||Traders invest with a 10% return each month.|
What is better Investing vs Trading?
There is no hard and fast rule that one is good and other is bad.
You need to do analysis as to how much time you intend to spend in doing research on the difference between investing and trading for beginners. As from the above article, you must have understood that both the differences between investing and trading for beginners have their own requirements like doing fundamental analysis, reading the charts, keeping track of the graphs. So you need to ask yourself how much time you are ready to devote. If you can spend minimum time for doing the background research on an organization and that too once, then Long term investing is a better option for you and Investing vs Trading.
If you have an ample amount of time and if you aim at doing a lot of research activity to truly play the market with risk managing strategy then you can go for trading. Research entirely involves analyzing financials of the company, historical price movements, future projections of the financials, etc. So this can be considered as a second job for you as you need to have a lot of energy and man-hours to be dedicated. Also, Trading tends to be expensive as every time you buy or sell stocks you have to pay certain fees and for an active trader, these fees add up and you have to make sure that your returns should be high enough to pay your costs otherwise your returns will suffer.
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