Trading and investing are two very common terminologies in the business and economics world. These two terms are often used interchangeably with one another. But there is an obvious difference between them. In this article, we will get to know the complete difference between trading and investing. This blog has the following main topics.
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Definition Of Trading
The term ‘trading’ simply means buying something and then selling it at an increased price so that profit can be made. Similarly, buying shares in the stock market and as soon as the price of that share increases, earning profit by selling it is called trading. Trading focuses on making short-term profits and does not care about the firm’s long-term health.
Types Of Trading
There are four major types of trading and they are as follows.
- Scalping – In this type of trading, we buy shares for a few minutes, and as the price increases even a little, we earn profits by selling them.
- Intraday Trading– In this type of trading, we hold shares for a few hours, and on the same day(before the market closes) we earn profits by selling the shares.
- Delivery Trading – Delivery trading is another form of trading in which an investor purchases stocks on a trading day and then sells them at a later date.
- Swing Trading- In this type of trading we hold shares for a few days and earn profits by selling the shares in one or two weeks
- Position Trading- In this type of trading, we hold shares for a few months and earn profits as the prices increases.
Definition Of Investing
Investing is the method of placing down a definite amount of money in a plan, scheme, or project in order to generate profit or income from its prospect. In investing, shares can be held for long-term like 1 year, 5 years, 10 years, and so on. You can invest in endeavors, such as using money to start a business, or in assets, such as purchasing real estate in hopes of reselling it later at a higher price.
Difference Between Trading And Investing(Table)
|Basis For Difference||Trading||Investing|
|Definition||It refers to the process of buying and selling as per the price movements.||It refers to the process of buying and holding securities for a specific period of time.|
|Term||Short-term||Medium to long-term|
|Tools||Based on technical analysis||Fundamental analysis|
|Profits||Risk is high, so generally, returns are high too.||Limited returns|
|Tax Pattern||Short-term capital gain||Long-term capital gains tax is applied on these returns.|
Key Differences Between Trading And Investing
Since we are comparing trading vs investing, let’s have a look at some of the key differences between them.
- The biggest difference between trading and investment is based on our perspective. If we have studied a company, understood its business, and bought shares thinking that the company will grow a lot in a long run, then we call it an investment. On the other hand, if we buy shares without studying the company and just by looking at the price patterns so that as soon as the price increases, we earn profit by selling them then we call it trading.
- In investment, we hold shares for a long term like for months, for years, for decades, and so on. On the other hand, In trading, we hold shares for a very short term.
- In trading, we purchase shares by simply looking at the price without knowing the details of the company. Whereas in Investment, we carefully buy shares of good companies because we hold shares for a long time.
- In investment, money is made in a long run and so the risk is low. On the other hand, money can be made very quickly in trading but here the risk is a little high.
With the above explanations, we can simply conclude that studying companies carefully and understanding their businesses carefully is called fundamental analysis. And we must do a fundamental analysis of any company before investing in it. But if we study the price of the shares of a company and try to predict its pattern, then we call it Technical analysis. And so, we also have to do a technical analysis of the shares before trading.