Stock markets with the convenience of the online trading system attract more individuals. Investors and traders are often used interchangeably, especially by someone relatively inexperienced in the financial market. But they are different players in stock markets as they need to follow different strategies and mechanisms to employ funds and make profits.
Understand Investing
Investing is traditionally the act of buying stocks and other financial instruments that can fetch significant returns and gradually create wealth over a long period.
- Investments are made for many years or even decades to add to wealth in the form of dividends, stock splits, and other corporate perks. Therefore, investors must select stocks of fundamentally strong companies that can stay stable in adverse economic situations and are expected to grow over a period.
- Generally, investors possess a well-diversified portfolio that includes equities, mutual funds, bonds, or other financial assets that they hold for the long term in a demat account. Demat meaning is the electronic form of financial assets that require a demat account.
Understand Trading
Trading means involvement in buying and selling stocks, commodities, or other financial assets frequently, depending on the trading style one chooses.
- Stock traders are aimed at earning quick or short-term profits. Traders typically buy securities at lower and sell them at a higher price within a certain period to make profits.
- Traders can follow different trading styles that differ based on the holding period of trading securities. A trader is a position trader if the holding period ranges between months to years, a day trader if the holding period ranges between seconds to hours in a trading session, or a swing trader if the holding period ranges between days to weeks.
Distinctive Points for Investing vs. Trading
Here are the key points to understand the difference between investing and trading approaches toward the stock market:
- Strategies
Typically, investors follow a buy-and-hold strategy to gain the most out of their investments. As a company grows, returns for its shareholders also increase. On the contrary, traders need to learn how to deal with market volatility, and stock price fluctuations in a short timeframe. Traders need to master various technical fronts to bet on short-term fluctuations in the markets. Also, investors need to be patient and stay focused on achieving their long-term goals even if there is a downturn in the market.
- Primary Account
Demat and trading accounts are two accounts required to enter the stock market. The primary account for stock traders is a trading account because they need to make frequent trades. On the other hand, a demat account is an investor’s primary account because they need to hold their financial securities for longer than traders. However, an individual needs to open both accounts for a smooth investing and trading process. Investors can open demat account with a discount broker offering free account opening services.
- Price vs Value to attain financial goals
Trading and investing help to pursue financial goals differently. Investors employ funds to achieve long-term goals with their growth in value and earn additional regular income. The essential quality of investors is patience and waiting for a reward. On the other hand, trading means employing funds for short-term returns attributed due to rise in stock prices.
- Factors to consider while buying or selling securities
To choose securities for trading purposes, traders need to focus on technical factors, like trading volume, moving averages, etc. On the other hand, investing in stocks involves considering the company’s fundamentals and long-term growth prospects. The parameters to gauge a company’s financial strength or weaknesses include price-to-earnings (P/E ratio), efficiency ratio, etc. They need to look at management quality also. Traders focus on the direction of the stock price and how they can profit from the stock price movement.
Thus, investing and trading can be differentiated based on financial goals, duration, risks involved, directions to increase gaining odds, and strategies. Know the skills one can master in the stock market and make prudent decisions towards market approaches.
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