Whether you decide to get into stock trading or investing, the goal is to make a profit. Either one has the potential to help you turn money into more money. However, stock trading and investing are two different things.
Before you decide which way you prefer to go, you should understand what stock trading is and compare it to investing. Let’s look at both and look at some of the key differences.
What is Stock Trading?
If you go into stock trading, you will be very active with frequent transactions. Stock trading includes buying and selling stocks, currency pairs, commodities, or other instruments on a regular basis. Sometimes, a stock trader is also called a day trader.
Groww.in defines stock trading as, “a sophisticated art of finding short-term mispricing in the market prices and capitalizing on them.” Trading is a short-term strategy to make profits in different ways.
There are multiple types of stock trading including:
- Day Trading – This type of trading includes buying stocks earlier in the day and trying to sell them for a profit before the market closes for the day.
- Position Trading – Stock traders using this strategy will buy stocks, hold them for a few months, and sell them at the most opportune time for profits.
- Scalp Trading – Another form of trading used is called scalp trading. This type of trading includes keeping high margins in play in order to gain from the smaller price changes. Often, scalp traders only hold stocks for a few seconds or minutes.
- Swing Trading – If you use the strategy of swing trading, you will hold stocks for a few days or weeks as you anticipate an upward movement in the price.
These are the most common types of stock trading. Each strategy is a bit different. Many stock traders will use more than one strategy to make a profit.
What is Investing?
According to Investopedia.com, “The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds, and other investment instruments.”
For most people, investing means opening an IRA or participating in a 401(k) offered by an employer. These are long-term strategies to grow your wealth. Investments are usually held for many years and even decades.
Investments don’t necessarily mean buying stocks, either. They can include anything from real estate to mutual funds to bonds to stocks. While many investments are done in the stock market, investing can be done in many different ways.
Stock Trading vs Investing: The Main Differences
When you look at both stock trading and investing, you can see how they are different. The main difference is the amount of time you will hold the investment. However, there are several differences. Let’s look at a few below.
The Risk
Investing comes with less risk, typically. It’s a long-term strategy to grow your capital. The risk is lower due to how long you will hold the investment.
When you get into stock trading, you’re taking on a bigger risk. Since it’s a short-term strategy, you are more susceptible to market volatility. If you don’t predict the stock you buy correctly, you can lose your money.
Usually, with investing, you will put your money into a fund or build a portfolio of multiple stocks. This helps to mitigate some of the risks of any stocks that may go down.
Stock trading is an investment in one stock at a time. You will take on the full risk of that one stock when you choose this strategy.
Time Commitment
Investing doesn’t require much of a time commitment. Most people can set it up to be rather automatic. For example, you can invest in an employer-provided 401(k) simply by having money deposited each pay period out of your paycheck.
You won’t spend time tracking your investments and worrying about their growth on a daily basis. When you get into investing, you may spend some time, at first, setting things up. However, once you’ve made your investments and set up any automatic investing, you’ll have a pretty hands-off approach.
Stock trading is exactly the opposite. You will spend time daily, weekly, or monthly checking the market. Since you will need to pick the right stocks, buy them at the right time, and sell them at the right time, the time commitment is higher for stock trading.
Profits
With stock trading, you have the opportunity to make much higher profits compared to investing. Often, you will be focusing on short-term profits. This means you may buy a stock that skyrockets and you cash out for huge gains. However, you will also need to cover any losses you take on.
With a good stock trading strategy, you can turn it into a regular income. It’s possible to not only grow your capital but also treat stock trading as a regular job or income.
Investing, on the other hand, won’t grow your money as quickly or as much. It’s less risky and set up to grow your money over time. Often, if you can get a return of 10% or more, it’s considered pretty well when investing.
The Analysis Style Used
Stock traders often use what is known as technical analysis. This type of analysis helps traders better predict what a stock might do in the short term. Most traders will use charts, graphs, and historic price movements to figure out patterns and choose stocks to buy.
Investors will often use fundamental analysis. This type of analysis looks at statements of accounts, cash flows, future growth, and key ratios of a company.
There are several benefits to stock trading and investing. Regardless of which you want to do, you should likely learn as much as you can before risking your money. Most people are investors, not stock traders. However, if you want to make buying and selling stocks your source of income, you want to become a stock trader.
Whether you’re interested in investing or trading stocks, you should do plenty of research. Make sure you understand what each is and how they work.
