Whenever we talk about wealth generation from stock markets, two words frequently ring in our ears which are ‘trading’ and ‘investing’. However, do they mean the same? Absolutely not. They are totally different approaches to grow your money through stock markets. Let us explore some key differences between them in the consecutive paragraphs.
However, before we do so, we would touch upon a common thread between the two. Whether you trade or invest in stock markets, you would require demat and trading accounts to enter and exit the stock market, as per SEBI guidelines.
Well, what is a demat account? It is simply a digital repository of your stocks. A trading account, on the other hand, is necessary for buying or selling stocks in the secondary markets. You can create demat account online for free. You can also create a free online trading account along with a demat account on your selected broker’s website.
Stock trading Vs Investing
Trading involves holding stocks for a short period of time. This time period could be as short as 24 hours, one week, or one month. Usually, traders hold stocks till the near-term performance of the concerned stocks is expected to be profitable.
Investing, on the other hand, is synonymous with long-term ‘buy-and-hold’ strategy. The investment duration is more than a year and may run up to a few decades. Market volatilities, therefore, hardly have an impact on stock investing as they get evened out in the long-run.
As mentioned earlier, you need to create demat account and free online trading account for both stock trading and investing. If you do not know what is a demat account or how to create demat account and free online trading account, you may seek more information on the same using internet search engines.
Trading involves growing your capital by taking advantage of fluctuations in stock prices. Using fundamental and technical analysis tools, you may be able to time the market and garner profits from short-term price movements.
Investing, on the contrary, involves exploiting the powers of compounding and dividend reinvestments to multiply wealth through stock markets. In other words, constant reinvestment of capital gains magnifies the effect of compounding as the investment tenure increases.
The general thumb rule applicable to both trading and investing is that you buy a stock when its price falls and sell a stock when its price rises.
As stocks are subject to high market fluctuations in the short-term, stock trading is riskier than stock investing. Infact, the shorter the stock-holding period, the higher will be the impact of market volatilities on stock performance and consequently, the greater will be the risk of loss or capital erosion.
Both have high return generation potential but if you have a longer time horizon at your disposal, then investing may be a better strategy for wealth creation as the risk component is lower.
Wealth creation strategy
Trading is an active wealth creation strategy as opposed to investing that is more passive in nature. Stock trading requires monitoring stock performance on a daily basis. If you are an intraday trader, minute-by-minute monitoring of price patterns and stock market trends is required.
Conversely, as a stock investor, you need not monitor stocks at short intervals of minutes, hours, days, or months even. You may track the performance of your stocks at periodic intervals of your choice, say every 12 months or year.
|Sr.No||Point of distinction||Trading||Investing|
|1||Stock-holding period||Short-term (hours, days, months, a year, etc.)||Long-term (3 years, 5 years, 10 years, etc.)|
|2||Capital growth||Through short-term stock price movements.||Through interest compounding and constant dividend reinvestments.|
|3||Risk||Very high||Low (Becomes negligible if investment duration is very long like 10-30 years, etc.)|
|4||Wealth generation strategy||Active||Passive|
The Bottom Line
While trading is useful in fulfilling your short-term goals and immediate liquidity needs,
investing is ideal for long-term objectives like retirement corpus, children’s education or marriage, buying a house, etc. Both strategies require different skill sets that come with focus, discipline, patience, and relentless practice. Ideally, you may employ a mix of stock trading and investing strategies to maximize your wealth in the long-run.