Investing vs trading

Investing vs trading

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The goal of trading and investing is to seek profit in the stock market; however, both these avenues have varied approaches in pursuing the common goal.

Day traders trading in the share market get in and out of stocks within days, weeks and sometimes even within minutes, with the intention of earning instant profits. In such a scenario, they tend to focus on the technical factors of a company’s stock rather than the long-term prospects of the organisation. In trading, what is of primary importance is in which direction the stock will move next and how the trader can benefit from that direction.

Investors in the Indian stock market have a long-term outlook. They consider their investments in terms of years and look to preserving their stocks for the long run in spite of fluctuations.

The critical difference between traders and investors is timing; also, focus plays a dramatic role in their outlook.

While investors analyse an organisation’s prospects for long-term growth or its worth, traders look to take benefit from tiny developments in the market. For instance, political uncertainty abroad could temporarily bring down the share price of a local manufacturer who sources parts from another country that is seeing a political upheaval.

Within trading, there are scalp traders who look to take a position in a matter of minutes, while day traders concentrate on day trading and swing traders may wait back for days or weeks.

Here are some key differences between trading and investing:

TRADING INVESTING
GOAL Quick earnings in a short period Modest to high returns over a prolonged period
TIME REQUIRED Need to monitor accounts frequently. Spend significant time exploring investments and inspecting every purchase. Occasional monitoring and checking the portfolio a couple of times in a year
RISKS Instant losses; high trading fees and higher tax rates on STCG A decline in some stocks over time; lack of quick gains
BENEFITS Soaring returns in a short period Compounding interest leading to substantial increase over a prolonged period; comparatively stable (if appropriately apportioned); LTCG benefits

Trading smartly

If you are looking to begin trading, here are some steps you can take to minimise your risk:

  • Build a plan that helps you to know when to buy and sell. For instance, you may want to sell a stock if its price rises or falls within a specific percentage.
  • Stay committed to your plan. The most challenging part of being a trader is to stick to your own rules. Sometimes, even veteran traders let down their logical thinking when specific stocks fluctuate. In spite of market rumours or emotions, it can be beneficial to think logically and hold fast to your strategy.
  • Decide in advance how much money you can afford to lose. Experts suggest trading no more than 5% of your assets, but you may have another percentile in mind that you must stick to regardless of market volatility.
  • Be aware of all aspects. Advanced traders employ sophisticated algorithms to look into any tiny inefficiencies in the market. With the margin of opportunity being extremely slim at the moment, it could be challenging to trade effectively.
  • Understand your taxes. Know your taxes on short-term gains and how much you will have to pay on short and long-term capital gains based on your taxable income.

Investing smartly

The key to build long-term wealth is to invest wisely. Here are some tips for doing it right:

  • Create a sound strategy or an investment plan to buy, sell and rebalance your portfolio. For instance, in a continually fluctuating market, an investor may want to sell some holdings and purchase others to realign their portfolio in line with their original goals.
  • Stay committed for the long haul. It is vital to have patience and discipline to stick to your investment plan, and more importantly, through market volatility.

Bottom line

Although trading feels good in the short term, every investor knows that time is their best friend. Regardless of whether you are looking to enter day trading or invest in the stock market for an extended period, open a demat account and trading account with a well-established stockbroker such as Kotak Securities. Having a trusted broker as your guide and financial expert can work wonders on your financial growth and goals.

 

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