Individuals can tap the stock market opportunities in two ways – investing and trading to generate profits. Suppose two friends enter the market with Rs.10,000. They buy the same securities. One decides to sell securities on the same day to make quick profits. It is called trading. While the other chooses to hold the securities for the long term. It is called investing. Both investing and trading can offer significant profits through market participation. Straightway, the investment horizon is the primary difference between the two. Let us elaborate on five key differences to understand the two approaches in the stock market.
Key Differences Between Investing and Trading
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Risk Involved
Stock market investments are about risk-reward ratio. Investing risk is lower than trading as investors do not focus on short-term market volatility. In contrast, trading is considered risky as traders need to take opportunities from short-term market fluctuations, which are challenging to predict accurately.
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Primary Account
An individual needs to know abount demat account meaning along with trading account and both accounts to enter the stock market. These are the mandatory accounts to invest in the stock market.
What is Demat Account and Trading Account: A demat account is an online repository required to hold all your financial assets in the stock market. It is the record of your investments. On the other hand, a trading account is required to access the stockbroker’s trading platform to buy or sell securities on stock exchanges. It is the record of your trading transactions carried out.
A demat account is the primary account of investors, as they need to hold their securities for longer and take delivery. Traders’ primary account is a trading account, as they make frequent trades. You can approach a reputed discount broker to open demat account online with your trading account. It will be free of opening charges with its unique subscription-based trading plans for beginners and experienced ones.
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Efforts and Skills
Success in stock market investments is all about how well you can analyse the market opportunities and securities to trade at a specific time. Starting their journey as investors, beginners need to put more effort into researching securities than traders. In comparison, trading requires regular analysis of different securities to determine the market movements and trends and book extraordinary profits. Trading is more about skills and efforts than investing.
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Analysis
An investor, through fundamental analysis of companies, invests in stocks. They need to learn how to read the company’s financial statements and understand ratios like the price-to-earning ratio and future growth prospects. In contrast, a trader’s decisions are based on a technical analysis involving an analysis of the stock’s past performance, patterns in price charts and trading graphs, etc., to decide profitability level.
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Types
Investors can strategize their positions in two ways:
- Value Investing: Investors buy the stocks of well-established companies, focusing on reducing the risk involved in the stock market.
- Growth Investing: Investors are aimed at increasing the investment value over time. They prefer to invest in stocks with a higher potential for growth, even if it expands the risk quotient.
Trading involves the following approaches:
- Intraday Trading: Traders buy or sell securities within the same trading session.
- Swing Trading: Traders can hold securities for days or weeks to make significant gains from their positions in the market.
- Scalp Trading: Traders buy and sell stock within a few seconds or minutes to gain from the smallest opportunity available for a short time.
- Position Trading: Traders buy or sell stocks within a few months.
Thus, investing and trading can be differentiated by strategies, risk, and time horizon. You can make significant gains in both based on your skills and knowledge. From the layman’s perspective, you may want to mix both. But trading demands experience that you can gain with more involvement in the stock market. You can gain from the market depending on your risk profile and availability of time to dedicate.
