Trading vs Investing: How The Two Stock Market Strategies Differ From Each Other

Investing and trading. These are the two most commonly heard terms surrounding the stock market and hence are often used interchangeably. But do these two terms mean the same? Certainly not.

Broadly saying, these are two strategies used in the stock market. Simply put, you can relate a T20 cricket match to trading, whereas both ODI and Test Match can represent investing.

Curious to know how?

Let us deep dive and understand these two approaches before you dip your feet into the stock market.

shutterstock

Also Read: Find Out If You Should Include Debt Funds In Your Equity Heavy Mutual Fund Portfolio

What Is Stock Market Trading?

Simply put, stock trading is like a sophisticated art of finding short-term gains in the market through buying and selling of shares and equities. Traders tend to take short-term positions in stocks, that usually range from a few seconds to days or sometimes months.

What Is Stock Market Investing?

Unlike stock trading which primarily involves the aim of making quick and short term gains, Stock market investing tends to pertain to the longer horizon. Like, when you purchase a stock for the purpose of investment and not trading, you remain invested and hold the stock for a longer-term so that its value grows and reaps you the benefit.

Even in the words of the great investor Warren Buffett, ¡°If you don't find a way to make money while you sleep, you will work until you die".

That's why it's important to invest your hard-earned money and let it benefit from the power of compounding in the long term!

Types of Investing

shutterstock

Also Read: How To Manage And Minimise Stock Market Risks

Primarily, there are two types of investing strategies.

1. Value Investing

This approach aims to reduce the risk by purchasing the shares of only well-established companies. While the value can be maintained through this approach, there tends to be lesser growth.

2. Growth Investing

This approach tends to focus on growing the value of investments instead of just holding or maintaining the value. In this, although the risk is on the higher side as the investors purchase stocks that have higher growth potential, the growth prospects too, tend to be higher.

Types of Trading

Primarily there are 4 types of trading in the stock market.

1. Position Trading

Traders adopting this strategy tend to buy and hold a stock for a few months. They look for the best selling opportunities within this span to gain from their purchase.S0, they position their purchase and sale in such a way that they can expect best selling opportunities within that time frame.

2. Swing Trading

Traders adopting this strategy tend to purchase a stock for some days or weeks to gain from the anticipated upward movement in the prices.

3. Day Trading

As the name suggests, day traders buy stocks in the morning and sell them before the market closes that day. Here, the idea is to capitalize on a single-day market rally caused by positive news or market sentiment.

4. Scalp Traders

Last but not the least, scalp traders keep high margins in play to gain from the smallest possible price changes in the stock. These traders usually buy a stock for a few seconds or a few minutes and make a profit out of even the tiniest opportunity.

Which strategy to choose?

shutterstock

Given that trading requires relatively high market skills, real-time analysis, and identification of the price movement in as little as a fraction of a second or minutes, to set your right foot forward to make gains, novices should avoid dipping their feet into trading, especially without the expertise of a financial professional.

On the other hand, investing is a less risky strategy even for novices, especially for those who want a source of passive income without devoting too much effort and time to the analysis every second or minute. Through investing, there are higher chances of growing your capital as an investor, and if you have knowledge and patience as well, you can benefit well from investing especially over the long term.

Although investing is for the short and medium-term as well, especially in mutual funds, you can maximize the power of compounding in the best way by investing for the long term, more so for financial goals like retirement corpus, child¡¯s higher education corpus etc.

Moreover, it's not that one has to always make a choice between these two strategies. You can do both as well if you possess adequate knowledge, investible surplus and risk appetite.

Also Read: Frequently (Not) Asked Questions - How Much Tax Am I Paying On My Mutual Fund Investment?

For more of such simplified financial content and the latest financial news, keep reading Worth. Click here.