How To Choose Between Investing And Trading

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Investing And Trading are 2 methods wealth creation can be achieved in the financial market. Through market participation, both methods use different approaches to make profit in the equity market. Investing involves buying stocks with large sums of money and holding for a long enough period to earn larger profits. Trading, on the other hand, involves putting in smaller amounts of money into the market and making the best out of the fluctuations in market prices to earn smaller returns within short time intervals.

Investing

The purpose of investing is to grow wealth over a long of period of time, typically years or decades. It is achieved by buying and holding investment instruments such as a portfolio of stocks, mutual funds, bonds, etc. People invest for many reasons. Some invest for retirement purposes while others invest to sponsor the university education of their children.

Investing requires learning the fundamentals of the business. Patience and commitment to staying invested for the long term is a necessity . Holding investments for long periods allows investors to make the most out of perks like interest and stock splits. Daily losses are regarded as inconsequential as the focus is on overall long-term growth. While market fluctuations are inevitable, investors are less concerned about that. An advantage of buying and holding stocks for a long period of time is the downtrends that occur will be canceled and even exceeded by the up trends. Profit is, thus, made in the long run. To further boost returns, investors usually compound or reinvest any profits or dividend into more quality stocks. Tracking holdings on a daily basis is unnecessary as investing takes a while to develop.

Stocks purchasing is one of the most common methods of investing. Buying stocks isn’t too complicated. You see a company listed in the stock market and buy some shares of the company. You can even make use of online stock trading applications to easily manage your stock. This makes you a shareholder and, thus, a partial owner of the company. If the company grows, your share price increases too and you make profit. It now depends on you to choose to leave your shares with the company hoping for future growth or sell to get your money together with the profit.

Trading

The goal of trading is to get high returns within a short period. It involves buying and selling of stocks, commodities, currency pairs, or other instruments within short time frames. The profits in trading are accrued by buying these financial instruments at lower prices and selling when the price increases. Accurate timing of the market is of utmost importance. It is, therefore, compulsory that traders take time to study the market and learn the trends so as to make accurate projections.

Trading is more risky than Investing. This is because it relies heavily on and benefits from market fluctuations which are highly unpredictable. Prices fall without prior warning and money can be lost easily. However, while traders generally rake in profits of 10-15% in a day, investors stick to an average of 10% in a year. Investors will typically ‘ride-out’ downtrends but traders only seek to make profits and have mechanisms to automatically close losing positions such as protective stop-loss orders.

Holding period also varies. Traders choose the amount of time to be active in the market for a trading session based on a couple of factors. These factors include amount of time available for trading, account size, level of trading experience, and risk tolerance. Some traders (Position Trader) hold positions from a few months to years. Swing traders hold their positions from a couple to days to weeks. Scalp traders hold positions for seconds to minutes without overnight positions while day traders hold positions throughout the day with no overnight positions.

One of the most popular approach to trading is with foreign currency pairs. Commonly known as Forex exchange, this method of trading involves trading currencies based on your predictions for their value. In simple terms, you buy currencies you think will increase in value, getting profit when it does and sell when you think they’re going to lose value.

Conclusion

Although one may be best suited for you than the other, both investing and trading will bring in profits in their own time . If you have a fairly large amount to spare, won’t mind a couple of downtrends in the market, and can commit for a long time, then investing is for you. On the other hand, if you’re a risk-taker and want quick returns on the capital you have within a short time frame, trading is the better option.

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