Trading and Investing are both related to equity markets but
are not the same.
Trading is for making money whereas investing is for
creating wealth.
Trading is for now and today whereas investing is for tomorrow.
The former gives you instant gratification whereas the latter gives you delayed gratification.
What is Trading?
Trading involves a higher frequency of activity,that is
buying and selling.
The point is to make profits by taking advantage of price
fluctuations.
The idea is to buy low and sell high within a short period
of time.
It is a short term process where risk levels are high but so
is the potential to make profits.
The risk profile for anyone to consider trading has to
extremely high since it is an extremely volatile process.
A trader is not concerned about the fundamentals of the
economy or the company, his approach is more micro motivated rather than macro
motivated.
A trader is heavily influenced by technical charts and
current market sentiments and has nothing to do with the long term prospects of
the company he is trading in.
Additional reading: Click Here to read Why you need a financial plan
What is Investing?
Investing is about discipline and patience, the ability to
just sit tight.
It is right up there with the most boring of activities and
yet the rewards are anything but boring.
You create wealth by holding and spending time in the market
and not by buying and selling and attempting to time the market.
It is a long term process that is meant for long term goals.
You don’t necessarily have to be the smartest person in the
room, you just have to be more patient and disciplined than the rest.
An investor is more concerned about the fundamentals of the
scrip or fund he is investing in, his approach is more macro motivated rather
than micro motivated.
An investor needs to have a risk profile that allows him to
stay invested for the long haul and is not affected by daily, monthly or
quarterly downswings.
Rome was not built in a day but it was destroyed in a day, in investing you cannot generate wealth in a day but in trading you can lose almost everything in a day.
Why understanding the difference trading and investing is
important?
There has been a huge influx of new participants in the
equity market post March 2020.
Equity markets have rallied beyond expectations with a
certain degree of pullback in the first half of 2022.
The initial rally along with people being locked up in their
homes lead to the inflow of several first time participants in the equity
markets.
None of whom had ever experienced a market correction, let
alone a crash.
This lead to several equity investors participating with the
belief that returns from equity investing is always linear and that the markets
behave rationally.
This can be better attested by looking at record number of
inflows during the start of the rally and then the massive downturn in numbers
in the first half of 2022 when the equity markets faced a correction.
The new market participants are heavily influenced by:
- Daily news
- Thoughts of every random stranger on their portfolio
- Daily market movement
They are also lured by new investing fads that prop up from
time to time in the form of NFO’s & IPO’s.
Many of these IPO’s have historically never generated
profits and yet find takers in the new market participants.
All the above factors are exhibited by those who assume
themselves to be investors when in reality their behavior is contradictory to
the claims.
If you cannot shut out outside noise, track the market
daily, are heavily influenced by amateur advice for your hard earned money and prefer
instant profits over long term wealth then may be investing is not your cup of
tea.
There’s no shame in accepting that but you will pay a heavy
price convincing yourself of being someone you are not, both in investing as
well as in real life.
Difference between
Investing & Trading
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Investing |
Trading |
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The idea is to let your investments
stay put for the long term for capital appreciation. |
The idea is to generate immediate
profits by taking advantage of the changes in prices. |
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The risk involved is lower
comparatively because the equity markets are more stable in the long run. |
The risk involved is higher
comparatively because the equity markets are very volatile in the short run. |
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The time period could be several years
or even decades. |
The time period could be several seconds
up to a month. |
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An investor is more concerned with
the fundamentals of his investments. |
A trader is more concerned with the
technical side. |
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An investor is not concerned with
daily market news, market movements or the latest trends in the market. |
For a trader, he needs to be aware of
every minute detail since that will affect his trade. |
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You invest today so you accumulate
wealth for tomorrow. |
You trade today so you make profits
for today. |
As an equity investor, you do not invest for today.
Therefore logic demands that you do not take decisions based
on the market conditions today.
If you prefer the returns of today over the potential
returns that equity investing can fetch you over the years then may be equity
investing is not your cup of tea.
Do not let your ego get in the way of an uncomfortable truth
for it cannot compensate for your impending real losses.
Growth in equity investing does not happen over- night but
rather over several nights, you can either dream peacefully or let it be your
worst nightmare.
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