Trading Vs Investing is debatable topic from last few years, some people say trading is better than investing while other says investing is great and no tension and worry about other factors.
Before saying anything good or bad about both instruments you must understand their nature, differences, advantages and disadvantages.
What is Trading ?
Trading means buying and selling underlying asset to make profit. Underlying asset can be of different types like stocks, bonds, commodities, steel, paint, animal, etc. Trading in commodities is good because it transfer value from one buyer to another buyers. Trading is a transfer of goods from one place to other.
Today we talk about trading in stocks, it is in future and options and intraday. Trading in derivatives is require less capital. In derivatives, underlying asset can be traded on the basis of contracts.
Contracts have expiry date and after expiry day contracts losses it’s value and it become zero. Derivatives have volumes buyers and seller.
Intraday happens generally in stocks, intraday have margin facility and it is provided by brokers. In intraday retailer can buy and need to sell those stocks at same day otherwise they need to pay charges to exchanges.
Swing trading require more capital than other two trading style means Future and Options, Intraday. Swing trading need charts and patterns knowledge to deploy capital and manages risk per trade to loss less.
All trading style requires technical analysis. Technical analysis includes chart reading, patterns, volume, news, indicators, etc to take correct decision.
What is Investing ?
Investing means deploying your money, capital, cash to complete demands of businesses. Investors have more free money, while business owner need money to run and expand their business so they make a deal. In that deal Business owner dilute their equity and get money from investors.
Investors get shares of that company in return of their deployed capital. Businessman make profit from customers and share it back to the investors in the from of dividends.
In investing, investors make huge returns while holding shares for long term but in trading it need to sell fast. With the help of fundamental analysis investors make any decision to invest or not into any company. Fundamental analysis means analyze companies ratios, history, growth factors and comparison with industry peers to take inform decisions.
Trading Vs Investing key Differences
Trading Vs Investing there are many key differences. First is time, in trading it can be hold for minutes and day. Investing is for 5-10 years and some times lifetime holding period.
Trading is a zero sum game, means money is transfer from one person to other no perfect outcome is defined. But investing have positive sum game in that everyone makes money.
In trading, you need to right two times first is what and second is when. Lets take example you need to choose which stock to trade and when you should buy it. If any one factor is missing then your chance of losses is very high.
| Differences | Trading | Investing |
|---|---|---|
| Time | Minutes to Days | Years |
| Type | Zero Sum Game | Positive Sum Game |
| Risk | High | Low |
| Returns | Less | High |
| Efforts | Very High | Medium |
| Analysis Style | Technical | Fundamentals |
| Value Addition | No Value in peoples Life | High Value |
Investing indirectly creates jobs and helps economy to grow in GDP terms but trading creates no value in the society.
Trading Vs Investing Which is Best ?
It depends on you, if you want to generate wealth then investing is far better than trading.
