5 Key Differences Between Trading and Investing

5 Key Differences Between Trading and Investing

This article covers the two buying and selling styles in online stock trading and the critical differences between them.

Introduction

Online stock trading is for those who deal with stocks for a brief time, seeking quick profits. Here, stock selection is based on their analysis of technical charts.

Investors, in contrast, buy stocks for the long term and wait patiently for returns.

Key differences between trading and investing

  1. Duration

Traders count on short-term trends to earn profits. They rely on price moments during intraday trading (buying and selling in one day) and exit after a short period. They have specific price targets; deals are closed once these are achieved. By contrast, investors look at the long-term prospects of stocks. Companies’ fundamentals are studied in-depth, and various financial ratios are calculated.

  1. Risk

Trading involves very high risk. While it offers the opportunity to generate returns that are much in excess of the invested amount, the invested capital may be entirely lost based on market conditions. However, this risk can be mitigated by using the stop loss function, which limits your losses.

Related Articles:

As opposed to traders, investors are not concerned with short-term price fluctuations. However, even long-term investment is not risk-free if the company’s fundamentals deteriorate sharply owing to competition, the product becoming obsolete, a decline in the way the business is being run, or changes in government policies. Therefore, long-term investors should keep track of company performance and take a call on exiting if expectations are not met.

  1. Art vs skill

Trading is a skill while investing is an art.A trader must be quick with decision-making on the trading platform as returns have to be generated during the day or a few hours. Investing is an art that requires judgement, intuition, common sense, and emotions. It requires patience to stay invested for the long term.

  1. Type of income

Traders earn profits through online stock trading activities, taxed as business income as per applicable tax rates under the Income Tax Act, 1961. Investors earn profits through capital gains, compounded as the business grows over the years. However, their regular income flows through dividends (amounts distributed by the companies in which investments are made). Dividends are taxed as income from other sources, while the profits from investing activities are taxed as capital gains under applicable tax rates.

  1. Type of individuals

Given the dynamic nature of online stock trading, to be successful, traders need to put in a considerable amount of effort and time. Investors, however, can afford not to check on their investments daily; they can go on with other business while investing online in the stock market.

Conclusion

Trading and investing are two types of online stock trading. While they require different skills and temperaments, both types of activities play a significant role in the thriving of the stock market.