The only similarity being the — ‘ing’
This report does not aim to glorify one over another, it just states true facts to take into consideration if you aim on generating passive income through the markets.
There are two types of players in the equity market- investors and traders, their names are often used synonymously. The incorrect usage of words in this industry could lead to huge blunders, hence clarity is crucial. Investing and trading are two contrasting mechanisms employed to solely turn a profit in the financial markets.
Approach
The major difference between Trading and Investing is the approach. Investing is based on fundamental analysis whereas trading is based on Technical Analysis.
Fundamental Analysis involves studying financial statements of the company, industrial growth over the years and, the overall macroeconomic factors of the economy concerned. The company’s health is of key importance to the investor!
Technical Analysis is a whole new ball game, they enter into comparatively short-term buy and sell positions to quickly realize their monetary goals,. It requires studying the historical data, price action, various trends, volumes and as many indicators as you could fathom. The trader simply cares about the profit, the company or the instrument is just a vehicle to that profit. An honest opinion, Technical Analysis takes time to master and there are new challenges each day. It requires significant ‘investment’ of your time.
Time-Frame
Investing is employing your funds in stocks and other financial instruments considering longer-term market participation. They are often held onto like family silver for several years or even decades!
Trading means in & out of your trade once you hit your profit target which could last over a few seconds to a few months. They just try to realize gains from the volatile trends in the market.
Riskiness
Whether you trade or invest, your capital is at the whim of markets and hence there is a risk-return tradeoff you should be mindful of. However, when it comes to investing vs trading based on risk, trading is riskier.
Investing as a habit takes time to develop and reaps results in long term. The risk-return tradeoff is comparatively low when the period of holding is less, however, if stocks are held for a long time, the compounding effect of dividends and interests can fetch much higher returns. The risk-return tradeoff extends until you think you have realized the maximum gain possible.
The indispensable reason why trading is riskier is that it implicates super quick short-sighted decisions, which may well be in your favor or against. Needless to say, trading can oscillate between highs and lows quite rapidly. The risk-return ratio usually treads around 1:1 to 1:4.
Psychology
Psychology would be hard to grasp if you have never traded or invested before, yet it holds cardinal importance in this field of study. Your perspective and paradigm to look at things influence your behavioral performance in an unimaginable manner.
Investing is of more relaxed disposition, it is only affected by the fundamentals. One bases all decisions on the conviction it has on the company’s growth prospects. The whole purpose of investing is beaten if you start fidgeting with your investments until fulfilling your monetary targets. One has to believe in slow and steady returns over the long haul.
Psychology has very strong inbound when you trade, it feels like a rollercoaster ride! A resolute control over your emotions is a pre-requisite or your capital may vanish within a matter of seconds!
Trading involves tighter risk management, disciplined capital allocation and a trading plan. Trading involves consistently devoting your time to the markets and keeping yourself glued to the screen.
What Is Right For You?
If you are a person who is extremely demanding, I would recommend trading is the new gig for you! Putting some extra hours after work or university, to read books and look at charts. Staying patient and understanding markets for their random nature is crucial. The hard fact to assimilate here is that a very tiny fraction of people turn profit while trading.
Investing in one form or the other is necessary, because money resting in your bank account does not compound itself. It requires a better journey. Investing would be for you if you’re patient and ready to see your money on the other side!
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