What is the Difference Between Investing and Trading?

Meet Jack and Jill. They are two friends who are interested in the stock market. Jack is a trader, while Jill is an investor. One day, they both decide to invest in a company called ABC Corp.

Jack decides to buy and sell the stock of ABC Corp frequently, based on short-term market movements, news events and technical analysis. He also uses margin trading, which allows him to borrow money to invest, in the hopes of magnifying his returns.

On the other hand, Jill takes a different approach. She does her research on ABC Corp and its long-term prospects, financial statements, and industry trends. She decides to hold the stock for a long time, potentially for years, as she believes in the company's growth potential.

Over time, they both observe different outcomes from their strategies. Jack's trading strategy can generate quick profits in a short amount of time if he is successful, but it can also lead to significant losses if he makes poor decisions, or the market turns against him.

Additionally, he incurs transaction costs such as brokerage fees, taxes, and interest payments on margin loans, which can eat into his profits.

On the other hand, Jill's investment strategy can generate returns over a longer period of time, as she benefits from the company's growth and profitability.

We think this is as easy an explainer we can give you of the difference between trading and investing. Let’s understand each in detail...

Investing

To put it simply, Investing is owning a piece of the business. When you're purchasing a stock as an investor, you're not buying a piece of paper. You are buying a stake in the business.

Imagine you are running your own business. What factors would you look at to see if your business is doing well?

• Is the business giving me enough return based on the money that I have invested in the business?
• Is the business growing steadily every year?
• Am I able to collect cash from my customers in time to pay back my suppliers and purchase more goods to sell?

These are the same questions an investor should ask when investing in any stock.

An investor always thinks like a business owner.

Will a businessman think of closing down his business if profits are down for 3 to 6 months or a year? He most likely won't. The same way an investor thinks long-term about the stocks he owns. Few quarters of bad results won't force him to sell his stock.

Investing is all about looking at the fundamental aspects of a stock and then deciding if that stock is worth buying or not.

The video below will help you understand more about investing...

Trading

Trading is simply buying a stock based on price. Here, the fundamental aspects of the business are not considered. Traders simply think in price terms. The judgment is simply based on human behavior related to stock price movements. A trader tries to predict how the stock price will move based on the collective action of multiple other players in the market.90520

Traders try to look at patterns from history to predict future movements in the stock price.

The video below will help you understand the mindset needed to be a successful trader...

What is Better Suited for a Retail Investor?

Trading involves a lot of activity and constant tracking of price movements. A trader normally has to be fully involved with the happenings of a stock market on a daily basis.

For majority of retail investors though, investing is about using savings to get a reasonable rate of return for investment in stock markets. Also, a retail investor might have a day job leaving limited time for him to dedicate to the markets on a daily basis.

Also, long-term investing is less likely to be volatile than trading and might suit the average retail investor.

Considering all these factors, it makes sense for a retail investor to follow the investing approach.

Overall, an individual should follow that he/she is comfortable with and also one that helps them get the best results from the stock market.

Watch this below video to know more: