scorecardresearchExplained: What is the difference between trading and investment?

Explained: What is the difference between trading and investment?

Updated: 09 Jan 2023, 08:03 AM IST

Trading entails buying and selling in a short duration of time to make quick bucks, whereas investment involves long-term wealth generation.

Investment is meant for professionals and amateurs alike while trading is a game rarely understood by rookies

Investment is meant for professionals and amateurs alike while trading is a game rarely understood by rookies

Chetan Bhagat is a best-selling author, film maker and a former investment banker. Besides these, he has another stream of income: to earn profits from his bouquet of investments in stock markets. 

Importantly – he claims to be an ‘investor’ and not a ‘trader’ in one of the videos he shared on YouTube. And so are legendary investors such as Warren Buffett, Peter Lynch and John C Bogle

But who is an investor and how is this different from a trader? Let us understand this in detail. 

An investor is the one who invests money in securities for a long period i.e., several years and earns interest, dividends, and even stock splits during the entire investing cycle.

On the contrary, trading involves investing in stock markets for a short duration to earn quick bucks. Those who practice trading are referred to as traders.

Buy right and sit tight

Let us understand this with another example. When you find a particular stock or mutual fund worthy of your hard-earned money, you want to follow the doctrine of buy right and sit tight, and you decide to invest 5 lakh in securities for foreseeable future. In this case, you are approaching your investment as an investor.

This is contrary to soaking your funds into the sea of stock market to buy securities, and then keeping track of market charts like a cricket scoreboard until you grab the right opportunity to sell them soon enough.

For example, if you buy securities worth 20,000 everyday and selling the same within a few day(s) to earn a small profit each time – you are indulging in trading.

Key differences

One of the key differences between trading and investment is that the former entails buying of stocks for a short-term period, and selling them soon – sometimes within a day or two. 

The latter, however, entails buying of stocks for a considerably longer duration, since you are convinced by the longevity of company’s business model, its future prospects and also the price at which its shares are trading.

While traders focus on market volatility to earn profit, investors depend on gradual appreciation of stock prices.

Another point of distinction is that trading is usually carried out by brokers and professionals who tend to carry out incisive research before investing their money. This is known as technical research.

They study charts, analyse patterns, make predictions of stocks and industries – and then invest their funds based on their analysis to make immediate gains.

On the other hand, investors also carry out research but from a completely different perspective. Rather than judging the stock prices and their pattern, they judge the future prospects of the company which should ideally be reflected in the stock prices in the time to come. This is known as fundamental research.

Market rise & fall

Investment involves wealth generation through general market rise over a period of time as it rides out the short-term falls, whereas in trading — profits can be made during market fall as well.

When the market falls, traders can earn profits by borrowing a security at a high price and selling it in the open market with an intent to buy it later at a lower price. This practice ais also referred to as ‘short selling’.

Notwithstanding these differences, trading and investments are different ways to earn profit through participation in financial markets. Although their approach and methodology are different – the goal is the same.

Investors should keep some margin of safety to accommodate the mood swings of the market
First Published: 09 Jan 2023, 08:03 AM IST