• HDFC securities
• 29 Dec 2022
• Knowledge Centre

The financial markets offer a plethora of options and opportunities to an individual to generate additional income, utilize idle money and generate wealth. Primarily the two main avenues in which an individual dabbles are investing and trading in Stock market

Investing and trading have gained more popularity in recent years due to the widespread availability of the internet and technology. The rise of digital technologies has led stockbrokers to provide online trading platforms , allowing you to execute trades in just a few simple steps is now easier than ever to open a demat and trading account in order to invest and trade. Due to easy accessibility, there has been a large influx of new market participants who want to know more about trading and investing.

One of the most common questions newer market participants pose is ‘trading vs investing, which is more profitable?’. To answer this question, it is essential to learn the difference between the two.

• What is Investing?

Investing is the process of buying an asset in order to benefit from the capital appreciation or interest payments over a longer period of time. Investing is based on the premise of enhancing the returns through the benefits of compounding or reinvesting the profits.

• What is Trading?

Trading is a process of buying and selling securities like stocks, derivatives or bonds in order to benefit from the short time price movement of the security. It is a continuous process that requires regular analysis and modification of the strategies depending on the market condition.

Here are some key points that outline the difference between trading and investing

• Time horizon

Investing is done for a longer time horizon than trading. Investors purchase security for a couple of months to a few years. Investing is done usually keeping long-term goals in mind. Trading, on the other hand, is for a short-term horizon. Traders can enter and exit within a few minutes or take on a positional trade for a few days or weeks.

• Risks

Investing for a longer period is less risky than trading. Trading can pose more risks, especially during volatile markets. Many trading accounts offer leverage to traders, which can lead to higher losses if proper risk management is not followed. While investing, there are internal risks of the company you have invested in and external macroeconomic risks that can affect your investment portfolio’s value.

• Costs

When an individual is involved in trading, a brokerage amount is charged on each trade. Moreover, taxes and other fees are also levied on each transaction. If the capital deployed is large, these costs can pile up. Due to the transaction costs associated with trading, investing is relatively more cost-efficient.

• Approach

An investor usually makes use of fundamental analysis while making investing decisions. This includes analyzing the business model, financials and management. Traders make use of technical analysis and indicators in order to create trading systems and strategies.

In conclusion, trading vs investing is a matter of an individual’s financial goals and risk profile. Although trading is relatively riskier, if done correctly, it can be a good way to generate returns. Meanwhile, investing is a great way to create wealth in the long term and is more cost-efficient than short-term trading. It is important for an investor to assess the risks associated with investing. An investor should do thorough research and analysis before investing their hard-earned money in the financial market.