Trading Vs Investing is one of the most common confusions among beginner level users who are looking to get some returns from their stock market investments. Are you one of those users? It is absolutely fine to be confused instead of staying adamant and losing a lot of money later.
Who does not want some extra money besides the primary source of income?
And who does not want to grow his/her savings at a rate faster than what conventional methods of investing like fixed deposits or recurring deposits offer?
So, driven by this desire, everyone takes one or the other path to some more money. There are three such well-known paths of earning extra income, namely investing, trading and pure gambling.
Trading Vs Investing Vs Gambling
A lot of people confuse trading with gambling and stay away from it assuming it will just lead them losing money at the end of the day.
Few others don’t really understand the difference between trading vs investing and with this confusion, they actually end up losing a lot of money.
Let us discuss the differences between these paths and the pros and cons of each one of them one by one so that you get to know which one may work for you the best!
The first way is investing in instruments for long periods of time.
The Goal of Investing: The primary goal of investing is to gradually increase one’s wealth over a period of time through buying and holding of a well-researched portfolio of stocks, baskets of stocks, mutual funds, bonds and other investment instruments for extended periods of time.
How Investors Earn: The ways in which investors earn money are compounding, or reinvesting any profits in buying more stocks and thus increasing more assets. Since the time duration is quite long for investments, investors also benefit from dividends and stock splits from their stocks.
The Process of Investing: Investors are not worried about day to day fluctuations in the prices of their stocks because their aim is not to make quick money in a short time. They research thoroughly about different aspects of companies where they want to invest.
They analyse the companies fundamentally and try to gather as much vital information as possible before investing in a particular stock. Balance sheets of the last few years, profit & loss statements, annual reports, management discussion, etc. are the things they look for.
The information they try to gather is not only about the financial health and management of the company but also about the long-term growth prospects of that particular sector and industry. It takes a lot of foresightedness and knowledge about the economy as a whole to make an investment decision.
That is the reason why investors feel confident even after a short-term downtrend in the prices of the stocks they hold as they expect that the stock prices will rebind and give them good returns in the long term which may be a few years or even decades.
The second path to extra income is trading. This is done for short-term returns.
The Goal of Trading: The goal of trading is to make quick money through frequent buying and selling of stocks, commodities or currency pairs. They want to be ahead of the buying and holding game that investors are engaged in.
With this understanding of the goal, a lot of concerns around trading vs investing clear out.
How Traders earn: Traders focus on buying at lower prices and selling at higher prices within a relatively short period of time. If they are bearish about a certain stock, then, they try to earn profits by selling first at higher prices and then, buying at lower prices. This method is called short selling.
This is another way how trading vs investing difference could be understood.
The Process of Trading: Traders play news based actions. They try to keep track of all the company news which may be relevant in bringing about a change in the stock prices. The following kinds of information are most sought after by traders:
Company news and releases about earnings, profits and future estimated earnings
Information like the launch of a new product or a product recall
Dividend payout information
Plans of organic growth or obtaining a new large contract
News about a possible merger or acquisition affecting the company
Changes in management
Any fraudulent activities that have come to highlight, etc.
All these kinds of information pieces help traders in making their trades but despite this, sometimes, the stock prices do not move in the desired direction. Since the time frame of traders is relatively small, they have to bear losses as well.
Again, a major difference between Trading Vs Investing styles and expectations.
They decide their stop loss before entering into a trade and stick to it in order to avoid even larger losses. The relation between risk and return is quite simple. The greater the amount of return wants, the greater the risk he/she is exposed to.
Traders often use technical analysis tools, such as moving averages, stochastic oscillators, etc. to keep the probability of winning their trade high.
This is another kind of hope of earning money and is the riskiest among all the three. Gambling is defined as staking something on a contingency.
Gambling is a time-bound event and once the game or hand is over, the opportunity to earn is gone.
One has either won or lost the game. A gambler puts up money in the hopes of a payoff if a random event occurs. The odds are almost always against the gambler and in favour of the house.
Despite that, people like to gamble in hope that if they win a game by any chance, they will hit the jackpot. The only thing that a gambler need is the luck factor. Gamblers need no tools and no strategies, such is the nature of the gamble.
The shocking part is that many people do not themselves know that they are gambling in the market.
For example, a person feeling pressurised by the peer pressure decides to invest in the stock market and enters into a transaction without having enough knowledge and understanding of how things work. Entering a transaction without a strategy or a stop loss is kind of gambling.
Gambling becomes kind of an addiction because it involves a lot of excitement and a constant hope to win the next game. If one loses, a hope to cover all previous losses and earn profits arises. If one wins, a hope to win another game in a similar way and make a big fortune arises.
Thus, it is difficult to stop.
So, What Exactly Are You Doing?
Now we know the differences among the three, especially the difference between trading vs investing.
We just need to introspect and try to know what kind we are. In order to make the best financial decisions for ourselves, we need to know our exact financial requirements and match them with our patience levels. We may choose to invest in trading if we want a steady and less risky return on investment.
Although the returns may not be as lucrative as the returns traders may enjoy by trading frequently, but one will not have to worry about the day to day fluctuations of the market. People who do not have much time to devote to thinking about growing money on a daily basis should opt for the investing option.
On the other hand, if one is ready to be on his/her toes all the time and actively engage in the current happenings, one may think of becoming a trader. The returns can be huge and risks can be covered by using complex and advanced strategies.
The time consumption on a daily basis will definitely be more but it might be totally worth it. Then, comes the option of gambling. It is almost a no-brainer. If one has a lot of wealth and does not mind parting with a small portion of it in hope of hitting a jackpot, one might try his/her hand at gambling.
All one needs for gambling is a lot of good luck on one’s side.
Choose carefully! Hopefully you have a clear understanding between the differences among Trading Vs Investing Vs Gambling now. Feel free to let us know your thoughts in the comments section below.
In case you are looking to get started with stock market trading or investments in general, let us assist you in taking your next steps forward: