Most of the newbie investors misinterpret that investing and trading as similar but these two terms are entirely different from each other. The people generally assume that stock market investing is speculation and therefore hesitate to invest their hard money into the stock market.
The stock market investing could be one of the best sources of generating higher returns on investment in the long run, however, there is simultaneously more risk as well. You must have heard that if the probability of profit is high, the risk is also high and contrary if the risk is less, returns would be less as well.
In this article, we will discuss how investing and trading is misinterpreted and confuse most of the new stock investors as well as what are key perspectives on which investing and trading are distinct from each other.
Investing vs Trading:
Most new investors think that stock market investing is just to buy few shares of any company listed on the stock exchange and sell it whenever the stock price of those shares appreciate. This is not exactly the meaning of investment, it is called trading. The people buy the shares for the sake of only getting profits in the shorter period or even some people buy futures and options of stocks, commodities, index or other securities just to bet and make profits if the price of such derivative instruments moves according to their expectations. There are basically three types of financial instruments which are traded, for instance, debt instruments (bonds, debentures), equity instruments (equity shares) and derivatives (futures, options). In fact, there are many differences between shares and bonds which you need to know before investing.
The fundamentals concept of investing in shares is simply you are purchasing the rights of ownership in the company in a certain proportion and you will get a profit share known as a dividend if the company makes a profit in a particular financial.
The investing and trading can be distinguished conceptually as follows:
- The investment means something you are going to invest for a longer duration of time, you don’t expect returns within a short time span. Trading, on the other hand, is done within the shorter duration of time sometimes it could be done in minutes as soon as the security price increases. Typically, investment in securities like stocks, bonds, debentures, government securities requires a longer period of time for providing returns.
- Investment is done with a motive for the long term, sustainable, and assured profit, whereas trading is done for short term gains. Many people enter share market for short term profit which is a more risky practice, instead, you should focus on long term gains. The stock market has the ability to give compounding gain over your initial investment provided one should invest in the right share and right company for long term. There are many successful investors like Rakesh Jhunjhunwala, Warren Buffett has made millions of dollars from the stock market investing.
- As you might observe the value of everything whether it physical products/ goods or services, continuously appreciating day by day. The price appreciation is a natural phenomenon, therefore, the prices of shares, commodities or any other financial instruments would also increase over time. Thus we can say that an investment is also natural and if you invest your hard money with the intention of investing, the probability of making a sustainable profit would be more. However, if you utilise your funds for trading purposes, you might make some instant profits, but you could be in the loss at the same time, especially if you are new to stock market investing.
There is another aspect of stock market investing that is speculation which is totally different from these terms. So if you are newbie, you should focus on those shares which can provide a capital gain in the long run that means you should follow the criteria of investment, not trading. However, if you are an expert and know all fundamentals, you can go for trading as well for short term gains.
In a nutshell, investment and trading can be interpreted as the mindset of individuals whether they are expecting gains in the short-run or long run. One should keep in mind money can’t be generated overnight, it takes some time to grow. Moreover, if you are expecting profit, it can be termed as merely a speculation.