Trading vs Investing
When it comes to wealth creation in equity market, trading and investing are the two genres of the field. However, both are very different approaches of wealth creation.
In Investing, always remember that Rome was not built in a day.
In trading, always remember that Hiroshima and Nagasaki were destroyed in a day.
Imagine, today, you and your friend bought equal amount of seeds to sow in your fields. However you sold these seeds to someone in a day or two because you could earn profit. (You can now use this amount for a new trade. )
On the other hand, your friend sowed the seeds and let them grow for a few years till they gave new seeds. He sowed the new seeds and continued this for years and sold a lot more seeds eventually than were bought. By investing his seeds he made profit quite different than what you made by trading your seeds. This is simply the difference in investing and trading.
To learn the same in financial markets, let’s learn 4 key differences between investing and trading.
1. Period
Trading is a method of holding stocks for a short period of time. It could be few hours, few days or few weeks. Trader holds stocks for short term high performance, whereas, investing is an approach that works on buy and hold principle. Investors invest their money for some years or may be for a decade or two. Short term market fluctuations are insignificant in the long term investing approach.
If you invest consistently, you can’t help but become very wealthy.
2. Capital Growth
Trading is a skill of timing the market. Traders buy and sell fast to hit the higher profits in the market and build their wealth. Missing the right time may lead to loss. However, investing is an art of creating wealth by compounding interest and dividend over the years by holding quality stocks in the market.
3. Risk
Both trading and investing imply risk on your capital. Trading comparatively involves higher risk and higher returns as the price might go high or low in a short while. On the other hand, investing involves comparatively lower risk and lower returns in a short run but might deliver higher returns by compounding interests and dividends if held for a longer period of time.
4. Art Vs. Skill
Let’s learn it this way, trading is a one day cricket match while investing is a test match. You would watch skillful players in the team who are expected to strike fours and sixes to score higher in a one day match. Whereas, the art of the game is seen in the test match. Similarly, traders are skilled, technical individuals who time the market and learn market trends to hit higher profits in the stipulated time. Investors on the other hand, analyze the stocks they want to invest in. Investing also includes learning business fundamentals and commitment to stay invested for a longer term. It is related to the philosophy that runs the business.
Great investing takes time.
Going back to our story, you are the one to decide if trading the seeds at a higher price making a smaller profit in a short time is your goal or holding on and growing more seeds to sell at much higher price in the long run is what you aim for.
So, Are you an investor or a trader? Remember, both of these approaches are fine. You just need to understand the basics of both these approaches.
We, at 9amPrime, really hope that you enjoyed this Education series article. If you did, please share it so that more folks can be reached and this Newsletter can grow. :)
Also, if you have questions, don’t hesitate!
Best Regards,
Team 9amPrime