Trading vs Investing: Which is the better? What are the major differences between the two?
Before we get into those details – both traders and investors should always remember one thing.
Both are in the market to make money.
Even the most experienced of investors or traders, tend to forget the basic goal of entering the stock market.
Investors get so involved in the art of stock picking, finding value, waiting for the right opportunity – that they forget, they are in the market to earn money.
The same with traders. They get so involved with learning more indicators, using complex strategies – that they forget they used to make money using much simpler strategies.
With experience and success, a trader often falls in the trap of beginning to think he / she is smarter than the market itself. This is when even big traders end up blowing their account and losing money they made over years on just a few trades.
This is usually the journey of a trader or investor:
- Beginner: Comes to the earn, but a few months into the market realizes it isn’t easy. Understands that succeeding in the stock market requires both learning and experience.
- Next: Tries to learn fundamental analysis or technical analysis. Puts in the effort, begins to make money and gets better results.
- But it’s at this stage where the informed and learned individual begins to get too consumed by his knowledge and ego – and forgets the reason why he came into the market – “to make money”.
In a place as complex as the stock market, simple investing or trading strategies can work wonders. Try it.
Think of it like this.
You have to drive between two cities. The destination is the same. But you are given two routes:
- A 500-km route on a 6-lane national highway. Long and boring.
- A 350-km route that passes through towns, villages and potentially dangerous areas. Short, keeps you alert and awake.
Which route will you take?
The human tendency here is always to take the shorter and quicker route.
Get to the destination quicker. Earn a lot of money from the market as quickly as possible. Who wants to wait for years?
In the example above, trading is the short route and investing is the long route. If you do not know to drive, the route you take will not matter. You will fail on both.
But if you invest time to gain skill and experience, you will probably do well in both.
However, it’s far more easier to become a successful investor than a successful trader. In investing, all you have to do is, buy a few quality companies and hold them for a long time.
In trading, you have to be pro-active, always doing something. This increases the risk significantly.
|Thinks Long Term (5 to 10 years or more)||Thinks Short Term (Few minutes to few months)|
|Believes buying a stock is part-ownership of company||Doesn’t bother about company or its business, looks only at charts|
|Earns from Buying only||Earns money both from buying and selling.|
|Likes Bull Market||Likes both Bear and Bull Market|
|Has to pay full amount in cash to buy stocks||Can use margin provided by broker to buy more with less money|
|Takes delivery of shares into demat account||May or may not take delivery of shares (Intraday)|
|Does Fundamental Analysis||Does Technical Analysis|
|Usually doesn’t keep stop loss||Keeps strict stop loss|
|Doesn’t care about daily price movement||Tracks every movement of the market and traded stocks|
|Less Stressful||Can be very stressful|
|Comparitively less risky||Very risky, especially for traders with less market experience|
|More people are successful at investing, many success stories||Less than 1% are successful full-time traders|
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