TRADING VS INVESTING – WHICH IS BETTER? Trading and Investing are the two faces of the same coin. The motto behind both is to get income. But their approaches to generating income are different. The trader seeks short term profit & the investor is looking for a return from long term strategy. The trader takes advantage of both sides of the market (Up & Downside market). In both cases, the trader can make their wealth. For trading, the trader needs highly technical skills for making a profit. In trading, how quickly you make a profit the same way you lose your money as well.
If you are a beginner in the stock market, you cannot understand the difference between the two. That is because you think you are investing, but actually, you are doing trading only. In this article, “Trading Vs Investing – which is better?” you will learn about the differences between the two. What are the traits of a trader & an investor, and why investing is better than trading?
To better understand Trading vs Investing, let us comprehend with what is Trading and Investing an example.
Suppose you buy real estate property somewhere in a rural area & you hold it for 6months or year only. After a year, when the prices of your property increase, you sell it and take your profit at home. That is called trading where you hold for short term and grab reasonable profit.
Whereas, if you hold the real estate property by seeing its future growth for the long term. You saw the rural area is now upgrading, metro and highways are coming to that area. The future value of that property will increase many folds. If you hold it for the long term by seeing its future growth, then you are doing investing.
The same way the stock market is working. When you buy shares and hold for only a day or a week or month that means you are doing trading only. Similarly, when holding for 5 or 10 years after analyzing the company, then you are doing Investing.
“Someone sitting in the shade today because someone planted a tree a long time ago.” – Warren Buffet
TRAITS OF A TRADER AND AN INVESTOR
Now, you know what is trading and investing. But when you are new to the stock market or a beginner than how you knew, you are doing trading or investing. Read slowly and understand the below points to know the traits of a trader and an investor to judge the battle of trading vs investing:
Price and Value
If you buy shares by seeing the prices of stock, then you are doing trading. Whereas, when you procure shares by looking at the value of the stock then you are doing Investing.
Here, the value means, you analyze how the company is working in past years. What are the market values of that company? What are the promoters and how well they are performing?
Warren Buffet said, “Price is what you pay & value is what you get.”
When somebody tells you the company is good, the price is favorable, the stock in the news and you buy that share, and then you are trading. But, for investors, that somebody is nobody. Investors never had heard mentality. They invest money by understanding the company properly & any news in the market did not disturb them.
Technical & Fundamental Analysis
When you buy shares with technical skills you are doing trading. If you are a beginner and doing trading with thinking of technical skills then you lose your money. That is because; the technical skills are highly professional. People who hold professional technical skills have managed tools that help them to earn in trading. But like you and me as a retailer without professional skills are dangerous in the stock market.
But if you are an investor, then fundamental analysis is everything for you. By fundamental analysis, you find out the intrinsic value of that share and then invest your money at a proper entry point.
If you are happy to make a profit maximum of up to 8-10 % only, then you are a trader. In the case of investors, profits are many folds minimum around 15% CAGR annually.
WHY INVESTING IS BETTER THAN TRADING?
Good CAGR Return
Whenever you start investing in the stock market, your main motto is to generate a passive income that increases your Networth. Investing in the stock market has the potential of achieving a colossal return. The average return you may get around 15-20% CAGR (Compounded Annually Growth Rate). The power of compounding plays its role to make your profits sky-high. Which you not able to achieve with trading in the stock market.
There are few examples where the people who invest have more Networth than the people who trade in the stock market. The best example is Warren Buffet ($79.2B Networth), the richest investor in the world, and George Soros ($8.6B Net worth), the richest trader in the world.
The biggest benefit while investing is the brokerage charges. When you invest, you need to give brokerage charges only once. But whenever you trade, with every trading you must give brokerage charges. That brokerage charge will erode your return.
No effect of market Fluctuations
While investing in the long term, there is not much effect of market fluctuations on the investor. Because investor invests their money in good companies & whenever the market is down, the price value of the company ultimately gets back to their actual values.
There is a quote which I read somewhere over the internet & I like it very much. The quote is “It is a fact that equity investments are Risky. But over longer periods of investing, the effects of Risk get removed”. The investors follow this rule and build their wealth.
While investing, companies provide dividends to their shareholders. Many companies contribute to a valuable amount of dividend. If the current market price of the shares is up and the company also provide dividends, it also helps you to increase your Net worth. The dividend appreciation is a beautiful experience.
By reading this article (trading vs investing), it is now easy to put your money in the stock market for investing rather than trading. Because trading is a kind of bad habit, if it sticks to you, it becomes more laborious to get your control over it. And by trading or speculating you are not earning for yourself; you earn only for the brokerage firms. Either you lose or win in trading you must give some part to the brokerage firms every time.
So be wise and focus on investing for long term strategy. You must invest but after properly analyzing the company, invest in a business, and enjoy additional dividend appreciations along with actual return from the market. Always remember Warren Buffet’s rule,
“Rule No.-1 Never lose your money, Rule No.-2 never forget rule no.1”.