A Comparison of Trading and Investment

Trading and investing are basically two distinct methods to earn profits in the markets (financial). The two terms hold different definitions and purposes. Both are equally important in the financial market and are a great source of earning income.

Investment

In Investing, there is a goal to increase or build up the wealth over a long time period. This can be done through different ways of holding or buying stock portfolio, bonds, investment instruments and mutual funds. Investors find multiple ways to increase their profits, either compounding or investing your dividends or profits in new shares or stocks. After making Investments, you can enjoy the perks of dividends, interests and stock splits. Investors are very keen about the shares of any company in which they invest. The fluctuation in the market and share prices, investors have to face both the profits and losses (depending on the type of shareholding they have). Investors are rational decision makers, so they’re more conscious about management forecast and price/earnings ratios.

How to invest?

You can invest in bonds or shares (ordinary shares, preference shares). However, the decision is considered to be wise if you’ve enough amounts of savings in your hand. If you have an outstanding debt, and still you want to make the little investment as well, then follow the following steps.

  1. Use your extra money to pay debts, credit cards, and mortgages. In some cases, the returns from the stock market are not sure, so it's better to pay off your debt, that can be guaranteed most of the time.
  2. If your interest rate is too low, then it's a wise decision to invest in bonds, stocks, and funds. A bond that yields low returns that the interest payment is not a worthy decision.
  3. Use your money to make some investments and debts as well. But if the interest rate on the debt is still high, it’s preferable to pay your debt first.

Trading

Trading is something the selling or buying of commodities, stocks, currency pairs, or stocks on a frequent basis. The main goal of trading is generating income on a regular basis and outperforms buy-and-hold investing.  Let’s suppose, an investor makes some investment from where he gets 10-15% return on an annual basis, whereas, in trading, the trader receives 10% of the return on a monthly basis.

In trading profits, the trader buys the stock at a low price and sells it at a relatively higher price that ultimately generates huge profits. In investing, once you make the investment and then the return will be fixed. Whereas, in trading, there is no limit to stock on the same price. Traders are more conscious about the technical analysis tools of moving averages to calculate the probability of trading setup.

A trade occurs for a short time period in which commodities, stocks or trading instruments trade in the markets. There are basically four types of categories of the traders.

  • Position Trader: In this type of traders, positions occur for months to years
  • Swing Trader: In this type of trade, positions occur for days to weeks
  • Day Trader: This type of trader positions occurs for the whole day without overnight positions
  • Scalp Trader: This type of trader positions occurs from seconds to minutes without overnight positions.

Traders are different in a sense that their style is totally based on the multiple factors of account size and the amount of time, dedicated to trading.

How to trade in the market

There are basically four steps, easy to trade in the financial markets. Just go through them for your own benefit

Know yourself

Analyze yourself with deep examination and get to know about the relationship with money. How do you see your efforts and struggles in terms of money? Do you think that you lost money through regular trading and will get much more from the financial market?

Get Educated before trading

Read books and market trends to get awareness about the behavior of stocks and other trading instruments. It’s very important to understand the jargons or financial language. Start following the market on a regular basis.

Tools for analyzing

In trading, traders use the technical analysis or fundamental analysis to learn about growth curves. Furthermore, read the spreadsheets of the company and other financial information.

Learn how to predict

By looking at the technical analysis and chart of the different companies, learn to predict the pattern and behavior of the market and make rational decisions.

Final Say

Both investors and traders earn profits by means of market participation. Investors earn large returns over a long period of time through buying and holding decisions. On the other hand, traders, investors, and traders seek profits through market participation. In general, investors look for huge returns over a long period. Whereas, traders earn huge profits and enjoy rising and falling markets over a short time period, generating smaller but frequent profits.