Trading and Investing
There have been instances where people use the terms ‘trading’ and ‘investing’ interchangeably.
However, in reality, these terms are poles apart in what they mean and entail. If you want to acquire a deeper understanding of the two, read on to know how they are different.
What is trading?
Trading refers to the buying and selling of shares, currencies, securities, stock commodities, or other financial instruments with the goal of generating returns. This trading occurs at stock exchanges; some of the most well-known stock exchanges worldwide are NASDAQ, New York Stock Exchange (NYSE), London Stock Exchange (LSE). These stock exchanges are governed by strict rules and regulations in order to avoid any cheating, discrepancy, or insider trading. The varied types of stocks are - common, preferred, income, value, growth, and penny stocks.
Trading takes place via two methods:
- Exchange floor: You might have seen movies or television shows depicting the floor of a stock market. People shouting, signalling, talking on phones, presence of computers and televisions, all leading to chaos. In this method, a trade can take up to three days to come into effect. In order to perform stock trading or options trading, there is a series of steps that need to be followed.
- Step 1: You tell your broker to buy 100 shares of a particular software giant;
- Step 2: The broker sends the order request to the clerk present on the exchange floor;
- Step 3: The clerk informs one floor trader about the order request, who then searches for another trader who is willing to sell the required shares;
- Step 4: Both floor traders haggle and agree on a quotation, which is then conveyed to the broker;
- Step 5: The broker will then inform you about the final price and wait for your confirmation; once this is done you will get a confirmation email in a few days.
- Electronically: In today’s time, trading usually takes place over the Internet as online trading. These electronic markets use computers to match sellers and buyers in a faster and efficient environment. In online stock trading, an online stock account allows you the liberty of using various websites for trading. Even in this method, traders are required as they have access to electronic markets.
Talking about traders, here are the various types of traders you may find in stock trading business:
- Fundamental trader: Traders who predict the movements of a particular stock in the near-future with regards to the performance of an organisation;
- Buy and hold trader: These traders are also known as long-term traders as they buy stocks and hold them for a long period of time;
- Day trader: A traders who buys and sells a particular stock on the same day;
- Swing trader: These traders usually buy and sell a particular stock across a few weeks or months.
What is investing?
Allocating money with the idea of earning beneficial returns in the future is known as investing. The basic goal of investing is to earn money or wealth over a long period of time through financial instruments. You can carry out online investments using investment apps too. Take a look at some of the investment methods here:
- Stocks: Stocks are shares of ownership in a particular company. They represent a claim on the organisation’s earnings and profits. Investors purchase company stocks for the purpose of earning profits either through dividends or by selling the stocks when they have a high share price. Earning dividends also enables investors to be eligible for tax benefits.
- Bonds: These are debt instruments in which an investor loans money to a firm in lieu of regular interest payments and the return of original amount of money when the bond matures. Bonds are usually dispensed by governmental agencies or corporations.
- Mutual funds: This is a combined investment pool of stocks, bonds, and securities that is controlled by an investment manager. Mutual funds are traded or assessed at the closing of trading day. Usually, investors are interested to invest in mutual funds as it has low risks.
- Exchange-traded funds (ETFs): An ETF is a saleable security that follows an index, a commodity, bonds, or a pool of assets like an index fund. It is traded like a regular stock on a stock exchange but the price keeps changing throughout the day as they are bought and sold.
- Alternative investment forms: These include real estate, private equity, and hedge funds. High net-worth individuals invest in alternative investment forms due to regulations on conventional investment methods and complex nature of their financial portfolio.
Should you take up trading or investing?
Both trading and investing are lucrative career options, so which one should you opt for? The advantages and disadvantages of each may help you decide.
Advantages of trading shares:
- Significant rate of return;
- Easy to buy and sell;
- Acquisition of real and tangible assets;
- Higher yield of dividend.
Disadvantages of trading shares:
- Great amount or risk involved;
- In-depth knowledge of share market is required as you are competing with professionals and experts;
- Unpredictable and volatile;
- Shareholders are paid last in the event of an organisation’s dissolution.
Advantages of investing:
- Limited amount of risk when compared to trading;
- Great returns in a short time-period;
- Easy to liquidate;
- Large variety of options to choose from.
Disadvantages of investing:
- High expenses and sales charges;
- High brokerage charges;
- Poor diversification of investment may occur;
- Formalities related to buying and selling are time-consuming.
Differences between trading and investing
Take a look at the key factors that differentiate trading and investment as two separate entities:
- Time period: In trading, stocks are held only for a short duration—it could be a day, few weeks or months. On the other hand, investment involves longer periods of time like a few years or even decades.
- Method of growth: If prices of stocks are high in the market, traders sell them to earn profits. While in investment, money is earned by compounding interest and dividend by holding stocks in the market for long-term.
- Risk: Both trading and investment have a degree of risk involved. Trading has higher risk as compared to investment as it offers higher rewards. Investment, on the other hand, has low risks and offers low returns in the short-run. However, in the long run, investment yields higher returns.
- Number of transactions: Trading usually involves multiple transactions in a series. On the other hand, in investing, only a single transaction is enough to fulfil the objective.
- Trade tools: Trading uses technical analysis to ascertain which stocks should be purchased or sold. Whereas, investment uses fundamental analysis to identify potential investment opportunities.
Technical analysis courses
Technical analysis is a discipline of trading that is used to evaluate investments and recognise trading opportunities by statistical trend analysis of trading activities.
If you are interested in the field of trading, technical analysis or investment, London School of Business and Finance (LSBF) offers various courses in this domain, such as Online MA in Finance and Investment, and Online Global MBA in Investment Banking.
This text was written by Varun Mehta and edited by Anisa Choudhary.