Investment vs Trading: A Comparative Guide

Money saved in a bank account might not yield more than 5-6% interest per annum, which is a meager amount if you consider inflation. As a result, investment and trading have become popular options for decent returns. Both are profitable avenues where you can deploy your money, and it generates returns for you over the tenure. 

However, since investments and trading offer higher returns, there are various risks associated with them. These risks are most commonly related to market fluctuations. You may even lose your money if you invest without proper research. Therefore, before investing, you must carefully analyze your options to pick the financial instrument that is best suited for you. Read through to understand investment vs trading.

What is Trading?

Trading is usually for a short-term, where the trader buys and sells financial instruments for a decent gain. For example, an individual can buy stocks. Later, once they see that the stock value is increasing, they can sell them to gain higher returns. The profit in trading lies in the fact that the difference between the buying and selling price of these stocks is significant.  The profit for the overall trade may be higher but not necessarily per stock basis. This means that if one buys any stock in large volume, even a small increase in price may result in large profit but per stock the movement might be small in price.

When compared to other standard investment options like FDs, this profit is way higher. However, there are downsides to trading too. Profits are never guaranteed. There are chances that the stock prices fall due to external factors. In that case, you may have to incur a loss.

Advantages Of Trading

• You can get back the money soon after trading. 
• The visibility of how well a financial instrument is performing is better when it comes to trading. This is because the prices of these instruments change daily, and the price changes are kept public. This makes it easier for you to keep an eye on high-potential securities. 

What is Investing?

Investment is a type of financial activity where an investor puts money in a financial instrument for a longer period of time. During that time, the investor will not have access to their money. Instead, the money will get a chance to compound with time. During this process, a profit is yielded, which can be taken out by the investor. Unlike trading, investing comes with a longer tenure. The longer the tenure, the higher the probability of profit.

Advantages of Investing

• You can expect decent to high returns if you from investing, provided you do proper research. However, market related risks are associated with them. 
• As investments come with a longer tenure, your money will have a greater chance of compounding. 
• The invested amount and the returns are transparent and assured in conventional options like FDs. 

Investment vs Trading

Even though both the concepts have their own advantages, the basic question which arises to many is trading or investment, which is better. Trading is  suitable for short-term buying and selling. On the contrary, investments are long-term. Let us go through some more of the basic differences between investment and trading.

Risk

Both options have risks associated with them. However, trading comes with more risk as compared to investments. The reason is short-term buying and selling. When an individual buys stocks or shares, there are chances that the prices will drop in the course of a day. There is no assurance that the prices will be consistently rising. Most trading options have comparatively higher risks, while investments come with lower risks compared to trading.

Period of Investment

Investing in a financial instrument and waiting for the desired outcome is time-consuming. An individual might have to wait for years before receiving their invested amount along with gains. However, trading being a short-term option, gains can be immediately retrieved at the time of selling. The best way to do trading is to reinvest the money in other stocks to multiply your earnings.

Capital Growth

As time passes, usually the capital grows with investments. But in the case of trading, there won’t be much appreciation of capital if you don’t trade properly. There is often a very low to moderate increase in capital. Very rarely, there might be very high capital growth. And this might be followed by a fall in profits. So careful analysis is needed before choosing the right trading option.

Returns

The amount of returns depends on the type of instrument chosen and its performance in the market. There is no thumb rule to compare investment with trading when it comes to returns. A few investment options can give very high returns, and a few trading options can give very low returns, and vice versa.

Style of Analysis

Proper research is needed in both trading and investing in financial instruments. However, the style of analysis varies between the two. For investments, the basic criteria for picking the right asset is based on a few factors. Risk, tenure, return, and liquidity form the basis for deciding which instrument to invest in. On top of that you have to perform fundamental analysis before investing in stocks. Similarly a careful market examination is needed to study the trend thoroughly. The rise and fall of prices should be carefully studied for a period of time, and the money should be deployed only then.

Conclusion

After learning about and understanding what is the difference between trading and investments, we can say that careful analysis is needed to choose between trading and investment. Having the money in a savings account is the safest option but it will yield lowest returns. However, money is not meant to stay idle. Rather, investing in various areas will promote its growth.

Frequently Asked Questions